Off the back of re-hot pricing conditions throughout 2021 and 2022, the reality of the Great Australian Dream, home ownership, has been slipping out of reach for many first home buyers. The question is, why have some young and low-income earners been able to enter the market while it seems impossible for others?
Many point to the millennial ‘avocado on toast’ situation as the byproduct of failed savings goals. While not spending $25 on brunch will assist you in your savings journey, the marginal benefit of this sacrifice seems low when a house deposit will require you dine out and eat avocado on toast more than 3 times a day, over at least a 5 year period.
The disparity driving inequality between those who are able to buy and those who aren’t, is obviously determined by a number of other factors not conducive to eating avocado in the morning.
What has driven the current state of inequality?
Tighter lending standards and dried up government fiscal incentives.
Let’s start with a quick history behind why monetary and fiscal incentives to propel newbies into the housing game have dried up in recent times.
In June 2020, the Federal Government announced its HomeBuilder package for the construction sector, encouraging a wave of first-home buyers into the market amid a volatile Covid-19 environment. By July 2020, lending to first home buyers increased by over $10 billion, before hitting a top of $30 billion in March 2021.
The result? Almost 40,000 additional households purchased their first home.
As home loan growth began to supersede income growth towards the back-end of 2021, the Reserve Bank of Australia (RBA) urged banks to maintain lending discipline and increased the minimum interest buffer on home loan applications from 2.5 to 3 percentage points. This ultimately made it far more difficult for first home buyers to meet threshold requirements for housing deposits.
Tighter lending standards coupled with a cut back of the Federal HomeBuilder grant and the rapid surge in house prices in 2021, significantly impacted chances of first home ownership and exacerbated an existing issue – housing inequality.
Investors driving out first home buyers
With the cash rate lingering at an all-time low of 0.1%, paralleled with a small chance of a near-future rate increase, existing asset owners and investors have been rewarded. The consequence? First-home buyers have been sidelined out of the market.
Many houses are being bought by the wealthy as second homes, and overseas buyers looking for a lucrative return are making it even more difficult. This has significantly contributed to recent house price growth.
The bank of mum and dad
According to the RBA governor, Phillip Low,: “If you come from a wealthy family and you’ve got the bank of mum and dad … that’s fine for those children. But if you don’t come from such a family it’s much, much harder to get into the housing market, and I think that’s a social problem.”
Given investors are dominating the market, this has placed significant pressure on Australia’s top 10 mortgage lender – the Bank of Mum and Dad (BOMD), while further entrenching wealth concentration as the children of asset owners find it easier to become asset owners themselves.
The BOMD is a colloquial term used to describe parental funding and according to Digital Finance Analytics (DFA), this ‘Bank’ is currently bigger than HSBC, AMP and Bank of Queensland.
In a similar vein, according to analysis by Westpac Bank, parents are also assisting their children by providing rent-free or subsidised accommodation, where even expenses and bills are being taken care of.
What can you do to get your foot in the door?
While inheritance, monetary and fiscal policies are ultimately out of one’s control, there are some simple strategies to take on board if you are struggling to enter the market for the first time.
1. First thing’s first – prove to your lender that you can save. Most lenders will have a mandatory savings policy and require you to demonstrate a consistent savings trend over a period of time.
2. Next, reduce your existing debt. If you are not meeting your periodic debt payments, this will not reflect well on your ability to manage your debt portfolio and lenders will be sceptical of your commitment to meet loan repayments.
3. Create a budget and determine whether you are able to afford home loan repayments to begin with. These are likely to be higher than rental payments. As a savings mechanism, put away the hypothetical funds you would typically use to fund a periodic mortgage repayment into an account.
These are just a handful of suggestions, however it’s certainly a place to start.
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