Households in four of Australia’s capital cities need six-figure incomes to afford a median-priced house without feeling the pinch, a new analysis shows.
Buyers in Sydney would need to make more than $190,000 a year to avoid spending more than 30 per cent of their income on mortgage repayments, a RateCity analysis found.
This is almost $90,000 more than the current average income, and assumes they have $235,000 to cover a 20 per cent deposit on a median-priced home.
To buy a median-priced apartment apartment, they would need to earn $122,900.
In Melbourne, household earnings would need to be above $140,000 for a house and $77,000 for an apartment. Six-figure salaries were also needed to buy a median-priced house in Canberra and Darwin.
The current average annual household incomes in Sydney and Melbourne are about $100,000 and $95,000 respectively.
The figures are a stark illustration of “how dire the situation has become in Sydney for a generation of first home buyers”, RateCity spokeswoman Sally Tindall said.
“Earning over $100,000 used to be considered wealthy, but in Sydney’s real estate market you can’t even afford a basic unit without going into mortgage stress,” she said.
“Buying a house in Melbourne is also tough for first home buyers. However, apartment prices are still reasonable and affordable for those looking to break into the market.”
While house prices have more than doubled in Sydney since 2008, and almost reached this level in Melbourne, the national weekly income has increased by $27 in the same time period.
University of Sydney senior lecturer Dallas Rogers said the household income figure required to buy a median priced home was “alarming”.
He warned mortgage stress wasn’t solely due to individual choices made by households but also due to lenders and the broader property industry.
“What this means for affordable housing and financial policy is that we need to do more than trying to get households to rein in their mortgage and household spending,” Dr Rogers said.
“We need policy to rein in the financial, mortgage, property development, and real estate sectors to change the structural dynamics that put people in mortgage stress.”
But University of NSW City Futures Research Centre research fellow Chris Martin said caution needed to be exercised with these measures of affordability as those entering the market wouldn’t necessarily be buying median-priced homes.
Simply, many buyers of mid-priced properties would be “upgraders” using equity from their current home to buy at this price level – which would reduce their mortgage costs.
And those who earn higher incomes would, of course, be able to afford a higher percentage of their pay taken up on repayments.
Despite this, and low interest rates keeping many home buyers’ repayments low, “Australian households are among the most indebted in the world, and it is hard to see how servicing costs can get very much lower than at present”, Dr Martin said.
“Interest rates may rise – and even if they don’t, repayments may rise if banks start getting serious about making interest-only borrowers start to pay back loan principal too.”
Already, some researchers are recording an increase in mortgage stress. Ratings agency Moody’s has found home loan arrears – where borrowers are behind in repayments – has reached a five-year high.
Roy Morgan found 17.3 per cent of borrowers in July 2017 were in this category, up 0.3 per cent over the year despite declining interest rates for home loans.
And the proportion who were “extremely at risk” increased from 12.4 per cent to 12.8 per cent in the 12-month period.
Roy Morgan Research’s industry communications director Norman Morris said nearly one in six borrowers faced a potential problem, which would be exacerbated when rates rise.
“[This] is likely to lead to an even lower number of borrowers but existing mortgage holders who have borrowed in a low-interest-rate environment are likely to face increased levels of mortgage stress,” Mr Morris said.
“The final impact, however, will also be determined by what happens to household incomes, which are currently showing very modest growth.”
Mortgage Choice chief executive John Flavell said there was no denying the expensive nature of Sydney property.
“The best thing borrowers can do to ensure they don’t find themselves in mortgage stress in the future if and when rates rise, is not stretch themselves too thin,” Mr Flavell said.
He recommended borrowers review their finances regularly.