If anecdotal evidence isn’t enough, the statistics speak for themselves. Data from the CoreLogic Housing Affordability Report (December 2016) indicates national dwelling prices have increased 19% over the past 5 years, while in comparison incomes have risen only 9.2%.
On average, prospective homebuyers need to save almost 139% of annual household income for a 20% deposit (up from 86% of annual income in 2001), and servicing a home loan now requires an average 36.8% of total household income (up from 26.8%). In Sydney, it’s even higher with a deposit requiring 168% of annual income, and a 44.5% serviceability ratio.
Bear in mind, these dynamics are playing out in the current low interest rate environment. Should interest rates rise, financially stressed homeowners will most certainly prioritise mortgage repayments over non-essential consumption, and with the tapering off of the mining and construction industry the broader economic consequences could be far-reaching.
So what’s the solution? There is of course no easy answer; rather it requires a multi-faceted approach requiring the advocacy and action of State and Federal governments, industry and the private sector in tackling the housing affordability challenge head on.
Housing affordability has been on the government agenda for some time, yet the absence of a dedicated housing minister appears to be a gaping hole in streamlining the multitude of efforts including that of the government to alleviate the problem, and a missed opportunity to influence policy at a federal and state level.
Firstly, there’s a need for a greater supply of land upon which to construct affordable housing (and in the process, ensure it is in proximity to essential infrastructure, jobs, transport and services so that residents can feasibly live and work).
The second aspect of government policy intervention is tax concessions in the form of stamp duty. The median house price in Sydney is now $1 million, with stamp duty levied at approximately $40,000.00.
The deposit alone requires a significant amount of after-tax saving in itself, leaving many first homebuyers who are already struggling to scrape together a $200,000+ deposit searching for alternative options to the traditional home buying process. This policy lever however demands careful deployment to avoid the unnecessary volatility this hyper-stimulatory lever can provoke.
The financial services sector also could embrace the challenge to innovate, and look at ways to manufacture products that will meet the needs of first-home buyers, without compromising on serviceability and risk parameters.
Shared and tiered equity loans, for example, have been on the periphery of lenders’ product palettes for some time but they could warrant closer scrutiny in light of the increasing wealth polarisation evident across the intergenerational balance sheet. Baby Boomers are asset rich (but often cash-poor), their wealth super charged by the prolonged property growth cycle spurts, while at the other end of the spectrum Generations X and Y are struggling to accumulate the deposit to enter the property slipstream.
As a result, parents have been shadow funding their offspring to buy their first property. There is an opportunity to develop products that could cater to this segment and find a ‘middle ground’ – somewhere between requiring parents to be a full guarantor and, at the other end of the spectrum, gifting their children the deposit.
For those Baby Boomers who do decide to take on mortgage responsibilities, product innovation around ‘time bombing’ equity participation and refined exit strategies could be a welcome relief for all equity holders – including children who ultimately desire financial independence.
There are no short-term fixes for the housing affordability conundrum, but there is much we can do to smooth the way forward. It’s a balancing act indeed and all of us – government, industry, developers – must play our part in advocating for change to ensure prospective homeowners and current homeowners alike don’t have to walk the housing affordability tightrope indefinitely.