If you've found yourself pondering the question ‘Why can’t I afford to buy a house?’ rest assured, you're not alone. A growing number of Australians find themselves in the same boat, grappling with this very question. Particularly for those whose journey towards homeownership began a few years ago, the anticipation of finally being ready to take the plunge by now has been met with a harsh reality—the goalposts have moved. This shift has left many questioning whether the dream of homeownership is slipping further out of reach, perhaps indefinitely.
Let us dive into what is going on, why, and what you can be doing to combat this.
1. Tighter lending conditions
Lenders have stringent criteria that potential homebuyers must meet to qualify for a loan. A key part of this is assessing a borrower's capability to repay the loan. The interest rate used to calculate the repayments a borrower can afford, considering their income and expenses, is based on an interest rate much higher than the actual rate they get. This is a precaution designed to ensure borrowers can continue to meet their obligations, even if interest rates rise. Generally, the assessment rate applied is the higher of:
A serviceability “buffer” set at 3.00% p.a. above the loan's interest rate, or
A minimum floor rate – currently around 5.40% p.a.
For instance, if a customer applies for a home loan at an interest rate of 6% p.a., the bank will assess their repayment ability using a 9.00% p.a. interest rate, reflecting the 3.00% p.a. serviceability buffer. This approach, although it provides a safety net for borrowers, limits the amount they can borrow by requiring them to qualify under these more stringent conditions.
Several years ago, when seeing interest rates of around 2% was common, assessment rates were significantly lower, allowing for a higher borrowing capacity. Research suggests that an individual’s borrowing capacity reduces by around 10% if interest rates rise by just 1%. With the rapid succession of interest rate increases we've witnessed, it's unsurprising that people's borrowing capacity has seen a significant reduction.
What can you do?
Lower your debt-to-income ratio: Aim to reduce your existing debts, like credit cards and personal loans, increasing your servicing capacity for lenders assessments. Credit card limits, regardless of if they are used or not, impact your borrowing capacity greatly.
Save a larger deposit: A larger deposit will decrease the loan you need to fund the purchase.
2. Increased living costs
It's no secret that the climbing cost of living is a significant barrier for many aspiring homeowners. Essentials such as food, healthcare, and transportation have seen their costs surge. This leaves individuals and families with diminished capacity for other financial commitments. When living expenses were more manageable, it was feasible for households to allocate surplus funds towards saving for a home deposit, paying down debts like personal loans and credit cards, or directing to mortgage repayments.
Adding to the financial strain, rental costs have been on the rise. Those who are renting while trying to save for a home find themselves caught in a tough situation as rents increase. This uptick is often a result of investors trying to offset their own rising expenses, further squeezing those who are already struggling to save for a deposit.
What can you do?
Cut out the fat: A critical examination of your spending habits can reveal opportunities to cut back and save more. Whether it is reducing unnecessary subscriptions, dining out less, or finding more affordable leisure activities, a lot of little things can add up.
Prioritise savings: Treating your savings like another non-negotiable expense can make it easier to save.
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Consider downsizing or House sharing: Downsizing to a smaller rental or embracing house sharing can lead to substantial savings.
3. Stagnant wage growth
Wage stagnation poses a considerable hurdle for individuals in multiple facets, including saving for a deposit, obtaining a loan, or managing mortgage repayments. A crucial factor for enhancing living standards and wealth growth lies in achieving a scenario where wages grow more rapidly than inflation.
While this hasn’t been the case for several years, there's a glimmer of hope on the horizon. In 2023, inflation was recorded at 4.05%, while the wage price index slightly outpaced it at 4.20%. This marked the first instance since March 2021 where wages have effectively risen in real terms compared to the previous year. Though the margin is slim, it is a positive shift.
What can you do?
Develop your skills: Investing in further education or professional development can open doors to better-paying jobs.
Increase your income: Improve your cash flow by securing a pay increase, seeking higher-paying opportunities, taking on additional work, or starting a side hustle.
4. High demand & limited supply
The combination of previously record-low interest rates enabling buyers to secure larger loans with smaller deposits, population growth, and increased investment property acquisitions by those already in the market has impacted the housing landscape. These factors have driven a surge in demand.
Limited supply, due to sluggish construction timeframes and homeowners remaining in their properties longer, has also contributed to an escalation in housing prices. This situation has complicated the search for affordable homes, especially in high-demand areas, making it increasingly difficult for many to enter the market.
What can you do?
Expand your search: Venturing into less competitive areas can be a more affordable option.
Be ready to act: With pre-approved finance in hand, you can move swiftly when you find the right home.
Consider a fixer-upper: Homes requiring work might be more affordable and less contested, provided you're up for the renovation challenge.
Consider alternative housing options: Traditional homeownership paths aren't the only way to enter the market. You could explore non-traditional paths like rent-vesting (renting where you want to live while owning and renting out property elsewhere) or co-owning with friends or family.
We get it- it can be disheartening to see your dreams and goals seemingly drifting out of reach. Though the road to homeownership is full of obstacles, a strategic and informed approach can make a big difference. Remember, every step taken towards overcoming these challenges is a step closer to holding the keys to your very own home.