Saving for a deposit is a challenge. Especially for first time homeowners given that housing prices have soared in the wake of the COVID pandemic.
Values saw a decline of just 2.1% between April and September 2020, before surging to new record highs by January 2021. According to the 2021 ANZ CoreLogic Housing Affordability report, Australian housing values increased 12.6% between the end of March 2020 and June 2021.
While the news is undeniably great for many homeowners, it’s not smiles all round.
The rapid hike in the cost of the average home has seen would-be first home buyers (FHB) handed a higher-than-average hurdle. CoreLogic reveals the time it takes to save a 20% deposit at the median property price has doubled since 2001.
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Based on households saving 15% of their gross annual income, it would take the typical household a record high 10.2 years to save a 20% deposit for an Australian dwelling at the end of June quarter 2021. This is across both Australian houses – clocking in at 10.8 years and units at 9 years.
While earlier ABS lending data suggests FHB activity surged between June 2020 and January 2021, the number of monthly first home buyer loans secured has since trended down, falling 22.8% between the end of January to August 2021.
“It is likely that FHB demand was largely concentrated through a period of overlapping government incentives. As prices continue to surge, FHB demand is likely to continue declining,” the report reads.
How is housing affordability calculated?
Housing affordability is measured using a range of methods, the most basic being the dwelling value to income ratio. This divides median dwelling values by median household incomes.
For example, a city where the median dwelling value is $500,000 and the median household income is $100,000, the ratio would be 5.0 (dwelling values are 5 times higher than gross annual household incomes).
However, applying this metric in isolation overlooks the practicalities of housing servicing costs in a low interest rate environment, and of obtaining home ownership through finance.
Corelogic’s analytics instead assess multiple metrics, including the number of years taken to save a 20% deposit, the portion of income required to service a new mortgage and the portion of household income required to service rent.
Time taken to save a deposit is a key metric in understanding the issue
The time taken to accumulate a deposit is a particularly important component of housing affordability for first home buyers. Existing homeowners benefit from increases in the value of their home – including due to blanket market rises.
FHB savings do not keep up with the pace of market rise. In fact, the current low cash rates have meant lower returns for money in savings accounts.
It’s also worth noting these savings are also often being accumulated while facing rising rental costs.
How is the number of years it takes to save a 20% deposit calculated?
For the purpose of this report, Corelogic uses median household income data and assumes a household can save 15% of their gross annual household income. They them use these savings to determine how many years it would take to save a 20% deposit on the median dwelling price.
For example, based on a 15% savings objective, a household earning $100,000 gross per annum would save $15,000 per annum. If the median dwelling value across the city was $500,000, a 20% deposit would equate to $100,000. Based on the household savings, it would take 6.7 years to save a 20% deposit.
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As expected, the location you are looking to buy a property plays a role, and unsurprisingly, Sydney and Melbourne again lead the list, with those looking to buy in Sydney looking at an average 10.1 years (85 in regional NSW), and 8.5 in Melbourne (7.1 in regional Victoria) to save the magic 20%.
Hobart sits in the upper end of the list at 8 years (6.8 for regional Tasmania), followed by Adelaide (6.9 years and 4.5 for regional South Australia), and 6.6 years in Brisbane and the ACT (6.2 for regional Queensland.)
Those looking to enter the market in Perth and Darwin fare slightly better at 6 and 4.8 years respectively – regionally, at 4.7 in Western Australia and 5.4 in regional Northern Territory.
Words by Melanie Hearse
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