This article explores the difficulties young Australians face in achieving the "Australian Dream" of owning a home. The discussion, featuring analysis of the housing market, lending practices, and economic factors, highlights the increasing challenges faced by first-time homebuyers.
The Struggle to Enter the Housing Market
It's becoming increasingly difficult for young people around the world to get their foot on the property ladder. In Australia, this challenge is exacerbated by specific factors that make homeownership particularly difficult for young adults. Many young people are relying on financial assistance from family members to achieve their dream of owning a home.
Lending Challenges and Income Assessment
Strict Lending Criteria
One major hurdle is securing a loan. Australian banks are very cautious. Banks focus less on the property's value and more on the borrower's ability to repay the loan. Banks assess a borrower's capacity by examining their income.
Debt-to-Income Ratio (DTI)
Banks generally don't lend beyond a debt-to-income ratio (DTI) of six to seven times the borrower's annual income. This means someone earning $100,000 might only be able to borrow $700,000. With a 20% deposit, this might allow the purchase of a property around $1 million. However, median house prices in cities like Melbourne ($1.03 million) and Sydney ($1.1 million) often exceed this, requiring substantial deposits.
APRA and Stress Testing
The Australian Prudential Regulation Authority (APRA) mandates stress tests for loan applicants. These tests assess whether borrowers can manage repayments if interest rates rise by three percentage points. Unlike Hong Kong, where income is assessed before tax, Australian banks evaluate net (after-tax) income. This reduces the borrowing capacity.
Impact of Credit Cards and Expenses
Credit card limits, even unused ones, are considered potential debt. Monthly expenses like car payments and student loan repayments (HECS) further reduce borrowing power. Banks use a minimum expenditure standard based on Australian Bureau of Statistics (ABS) data, reflecting average spending habits, which may penalize those who are frugal.
The Impact of Student Loans
Student Loan Burden
Many graduates face significant student loan debt. A four-year degree can leave a graduate with a debt of $100,000. While repayments are income-contingent, this debt can linger for decades.
Car Ownership and Location
Commuting from more affordable areas often necessitates car ownership, adding to expenses. Rising car prices and fuel costs further strain finances.
Wage Growth and Affordability
Stagnant Wage Growth
A recent report by the Per Capita think tank highlights the difficulty for young people to enter the housing market. While house prices continue to climb, the real purchasing power of wages has only increased by 2.6% in the last 10 years (2012-2022), compared to a 16% increase in the previous 20 years.
The Dream Deferred
The study also found that while 80% of young people believe owning a home is a reasonable aspiration, many feel it's only achievable through parental assistance or inheritance.
High Interest Rates
Australia's historically high-interest rate environment also contributes to the problem. Even after 2008, Australian interest rates were often higher than in other countries, increasing the burden of mortgage repayments.
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In Hong Kong the approximate mortgage rate is 5.5%
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In Australia the approximate mortgage rate is 6.3%
The Bank of Mum and Dad
The Reliance on Family Support
Increasingly, young Australians rely on the "Bank of Mum and Dad" for financial support. Analysts estimate that in 2022-2023, 15% of first-time homebuyers received parental assistance, injecting $27 billion into the housing market. This has led some to joke that the "Bank of Mum and Dad" is the ninth largest mortgage lender in Australia.
State Variations
The level of parental assistance varies by state. In New South Wales (Sydney), parents contribute an average of $92,000, nearly two years' worth of pre-tax income for a young person.
Changing Intergenerational Financial Dynamics
This reliance has led to a shift in intergenerational financial dynamics. Many young adults are living at home longer or receiving ongoing financial support from their parents for expenses beyond housing.
Changing Values and Lifestyle
For those who can’t afford a home, they are adopting new ways of thinking. Options being:
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Choosing to rent rather than buy
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Having the flexibility to travel often
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Waiting for inheritance to buy a property
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Relying on financial assistance from family
Implications for the Future
The long-term consequences of these trends are uncertain. It may affect family formation and social structures. Also, financial independence of younger generations may be delayed.
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