- It is harder than ever to own a home, with high interest rates, elevated prices, and housing scarcity.
- Making a home deposit not impossible with some savvy money saving strategies.
- Homebuying is about acquiring the best asset you can have with the available resources at your disposal.
The time required for an average young couple to save for the 20% deposit of an entry house has fallen by two months, according to a recent Domain report.
Upon hearing this news, some may rejoice, thinking it is a sign that the tides are turning.
Not so fast.
The report noted that couples spent an average of 46.5% of their incomes servicing mortgage repayments. For units, the figure fell to 30.7%.
Mortgage repayment on entry-priced home as a percentage of income for couples aged 25-34
Imagine spending half of your income just on your mortgage alone.
Currently, homeowners looking to buy face a double whammy of high cash rates and inflated housing prices owing to the supply-demand imbalance pervading the Australian housing market.
National weekly asking property prices
The national weekly asking property price for a home is $832,915 as of March 2024.
That’s a lot.
It is no secret that Australia’s housing market is in a bit of a pickle.
Breaking down the housing crisis
We need more homes. Federal and State Governments know this and have made grandiose promises, but there have been substantial doubts over their ability to deliver.
Australia’s construction industry has struggled to meet demand, with material price hikes, market instability, and cash-flow problems contributing to waves of insolvencies plaguing the sector.
This has also contributed to the industry’s low reputation among Australian consumers recently. Building new is more expensive than buying established, and the journey is fraught with precarity—projects go over budget, are not delivered on time or to specifications, or are just not delivered altogether.
Population growth and migration into Australia is escalating demand, both in the housing and rental sectors.
Assuming one is not among the many borrowers made bankrupt by the high-interest rate environment, the so-called housing crisis has been an auspicious period for landlords, who have seen rents and home values go through the roof.
National asking rents
Rather than calling it a housing crisis, this era might be better framed as a housing cycle benefitting landlords.
Investors rich off the profits of the current housing cycle have been snapping up homes where they are still (relatively) affordable, drawn by the lure of deliciously high yields, particularly in areas like Perth where rental vacancies are close to non-existent. This has catapulted prices in these areas and priced first-home buyers out of the market.
Perth rental yields
As housing affordability gradually becomes a pipe dream, many have resigned to a life of permanent renting in one of the worst rental crises to date.
Considering the dearth of choices and heightened home prices, those who can afford their first home are left wondering whether they should wait out the current housing cycle.
The adage is always to buy rather than rent because a property is a great hedge against inflation. The world’s largest store of wealth next to gold, properties have historically risen in value at a rate outpacing inflation.
Thus, we asked several of Australia’s top property experts the million-dollar question: How on earth do you buy a home during a housing crisis?
First step: Saving for a home deposit
Property Investment Professionals of Australia (PIPA) Chair Nicola McDougall told The Property Tribune that saving for a home deposit has always been challenging.
“It’s important that prospective homeowners set aside a regular sum that they can affordably and consistently save – preferably in a separate bank account or even in a separate bank,” she said.
“Lenders will consider your living expenses as well as any personal loans that you have, so try to reduce these as much as possible during your saving period.”
University of Adelaide lecturer of property, Peter Koulizos, elaborated that the first step in your first-homeownership journey is to visit a lender or mortgage broker to determine your borrowing capacity.
“This will mainly be determined by their income. Once this has been determined, they can calculate how much deposit they need to save up to meet the lender’s Loan-to-Value Ratio (LVR) criteria, e.g., 10% deposit, 5% deposit,” he said.
“For example, let’s say they want to buy a home worth $600,000. The lender says that they can borrow $550,000 and require a minimum of 10% deposit, they will need to save $50,000, plus any other costs such as stamp duty.
“Once they know how much they need to save, they can put a plan in place.
“For example, to have a house deposit of $50,000, they could save $500 per week for 100 weeks to achieve their goal. If, at the moment, they can’t save $500 per week, they will either need to cut spending in other areas or lower their expectations and buy a cheaper house, which means they require a smaller deposit.
“Formulating and sticking with a budget is a great way to start saving for a house deposit.”
Four useful tips for making a home deposit
Aus Property Professionals founder and managing director Lloyd Edge gave us several invaluable tips to help aspiring first-home buyers reach their savings goals.
“To prepare for a home deposit, prospective buyers should examine their current spending habits and find ways to maximise their serviceability or the amount that the bank is willing to lend them,” he said.
“In fact, most buyers borrowing capacity has declined up to 30% over the year due to higher interest rates and the impact of inflation.
“Making small changes will allow you to maximise your borrowing potential, alongside improving spending habits.”
First, cancelling and reducing credit cards is critical to improving your borrowing ability.
“It’s a no-brainer. If you have any credit cards that you aren’t using, just cancel them. The banks will consider the credit card limit liability even if you don’t owe anything!” Edge said.
“For the credit cards that you do have, reduce the limit to a sensible amount and try to pay it off each month. It is best to use a debit/savings card over a credit card and keep your credit card only for emergencies, with the limit as low as possible.
“Without credit cards, your living expenses in your serviceability calculation will reduce.”
Second, avoid cash-in-hand jobs.
“You may be tempted to take cash in hand for some work you do, if you work in the trade industry or a services industry, to avoid paying more tax.
“Although this is illegal for tax avoidance, another consideration is that without the proof of what income you have actually earned, the lenders will only be able to offer you a loan based on the income as proven through your tax returns- and some lenders may even request to see up to two years of history.”
Third, reduce unnecessary spending.
“When you look at your regular monthly bank statements, I implore you to go line by line and investigate what expenses can be cancelled or reduced—no matter how small they may be,” he said.
“Do you really need subscriptions to every streaming service like Netflix, Stan, Disney, Amazon Prime, FOXTEL, and Paramount? If possible, cancel streaming services or just stick to one service at a time to reduce your spending.
“Take a look at your phone and internet bills and compare how much you are spending on your plans against how much of your plan you are actually using.
“It’s highly likely that you took a much larger data plan than you need, so investigate reducing these costs if possible.
“Another area that might surprise you is how much you are actually spending on takeaway food. Many people don’t realise that the daily coffee, afternoon treat and takeaway on weekends really add up to a large amount over the month.
“Once you are able to critically reflect on your spending habits, you will notice your borrowing capacity will improve, and you will have a better ability to service any loans.”
Finally, Edge said to shop around for lenders for the best possible outcome.
“If you are struggling to reach the pre-approval amount you need to purchase that property, you may get a different outcome if you look to another lender.
“The best way to ‘shop around’ for a lender is to use an experienced mortgage broker who understands your needs and can help you to find a loan that really suits your needs.”
Does it always have to be 20%?
Often, the term home deposit is used interchangeably with the term 20% deposit. We asked the experts: Does it always have to be 20%?
Edge explained that saving for a 20% deposit is a way to avoid the additional cost of a Lender’s Mortgage Insurance (LMI) and obtain an ideal LVR, which refers to the amount borrowed you borrow compared to your deposit.
Here, LMI is an insurance protecting the lender in the event that you default on your mortgage.
“Most first-home buyers don’t have a 20% deposit. Rather, it’s often between five and 10%, with many lenders offering home loans for first-home buyers with higher LVR ratios,” chimed McDougall.
“There are a variety of first homeowner grants and concessions available for first home buyers.
“However, many are tied to purchasing or building brand new dwellings, which may not be the best property for them to purchase.
“This could be because of higher purchase prices or because they are located on the city fringes, which doesn’t suit a young person’s lifestyle or is miles away from their workplace and friends.
“While grants such as these can seem attractive, they may not necessarily be fit for purpose for everyone.”
“I would encourage owner-occupiers and investors to buy a property with the minimum deposit required.”
Peter Koulizos, University of Adelaide
“For example, if you want to buy a $500,000 home and the bank’s minimum deposit is 5%, you only need to save $25,000. However, if you want a minimum of 20% deposit which is $100,000, this will take much longer to save up. In the meantime, house prices will continue to rise and make buying a home even harder,” Koulizos said.
“First-home buyers can avoid paying the LMI if they qualify for the Federal Government’s First Home Guarantee.
“Investors will need to pay LMI if they buy a property with less than 20% deposit, but the LMI is a tax deduction as it is a cost of doing business.”
“Looking at Government grants available in your state could help you get some extra assistance in buying your first home. The Nationwide First Home Loan Deposit Scheme (FHLDS) enables eligible first-home buyers to purchase a modest home with a deposit of as little as 5% (lender criteria apply),” Edge added.
“This is because the National Housing Finance and Investment Corporation (NHFIC) guarantees to a participating lender up to 15% of the value of the property purchased that is financed by an eligible first home buyer’s home loan.
“However, the Scheme supports up to 10,000 guaranteed loans per financial year. There are limitations and eligibility requirements.
“To make the most of your deposit, it is important that you check all the available government grants and schemes available to you on your State or Territory government website, as these schemes will differ across the country.”
How to choose your first home?
If you are in a position to purchase your forever home, then you can focus on choosing exactly what you want.
For everyone else, the experts said prioritisation is key.
“First homebuyers should purchase what they can comfortably afford, which, depending on their personal circumstances, could be a house, a townhouse, or a unit,” McDougall said.
“They should always remember that their first property won’t be their last and should be viewed as securing a foothold in the market that they can leverage to upgrade in the decades ahead.”
Koulizos suggested choosing a house over a unit for a stepping-stone home, as they typically have better capital growth than units. Additionally, he pointed out that homes close to the city or the sea have better capital growth.
Rather than buying new, Edge emphasised that location is key to protecting the future value of one’s home.
“Look to buy away from busy roads but close to amenities like public transport and schools because these properties will always be in demand.
“Buying brand spanking new means that you’re paying a premium, and it will take a bit of time for you to make equity in the property; you will also not be reaping any of the depreciation benefits of a new home if it is your primary residence.
“It would be wiser to buy a home that is well-located but needs a bit of care so you can renovate and improve the value of your property to create equity and supercharge your deposit for your next home.”
On the subject of whether a house or apartment makes for a better first home, Edge said it depends.
“Whether a house or apartment is a better choice really depends on the specifics of the location. Look at the demographics of the area and buy a property that is suited to the surrounding lifestyle.
“Apartments are lower maintenance, easier to care for, and a great stepping stone for a first home, but it’s important you do your due diligence, review the strata reports, and ensure the sinking fund is adequate.
“Houses are likely to appreciate more than apartments because the land value increases over time, but don’t discount the potential of well-located apartments.”
Making your first foray into homeownership a smooth ride
The cornerstone of a smooth sailing first homeownership experience is simple.
Buy what you can afford.
Sure, it might not be that dream four by two that’s all glass, perched atop a hill affording a sweeping view of a pristine swimming beach with the odd renter sauntering about.
It’s not the coastal Byron Bay or Apollo Bay or Cottesloe dream you envisioned for yourself.
In fact, it’s actually pretty ramshackle. The real estate agent assures you it will look ‘fine’ with a ‘coat of paint’.
Nevertheless, what’s important is that it is yours.
“A smooth first home buying experience starts with realising that you will have to make some sacrifices now to buy a home and pay off the mortgage,” Koulizos said.
“The other alternative is to stay a renter and pay rent until the day you die.
Peter Koulizos, University of Adelaide
And if you are one of the everyday Australians struggling through the rental crisis, your mortgage repayments will be higher than your rent.
That means reevaluating your priorities and making financial sacrifices. This may mean taking another job, stopping your nightly eBay therapy sessions, or giving up your weekly bender at Chapel Street.
“Many first-time buyers struggle with the lifestyle adjustment when buying a home because there is pressure to cover the mortgage repayments, and there is a risk of buyers suffering mortgage stress,” Edge said.
“Mortgage stress occurs when a household’s mortgage repayments are 30% or more of the total household pre-tax income. This is recognised as the point at which someone will struggle to make mortgage repayments and maintain a lifestyle.
“To avoid a situation where you are under mortgage stress, you should avoid taking high risks when buying property. It is best to always plan for the worst but hope for the best when considering your mortgage repayments.
“This means always planning for the worst-case scenario and ensuring you can afford the repayments should they go up by 3% more than the current interest rate. You should always test whether you can afford higher interest rates, even if you think this scenario is highly unlikely.
“If your personal situation changes, the first thing you should do is contact your broker and see whether you can get a better deal on your mortgage.
“Other considerations are that you may need to pick up additional work to cover the mortgage repayments or find smart ways to increase your household income. If you feel you’re coming under mortgage stress, consider renting out your garage or excess space for storage.
“Reducing discretionary spending on takeaway, entertainment, glamourous clothing, and non-essentials will go a long way to avoiding mortgage stress.”
“Saving for a deposit can be the hardest bit as many first home buyers are paying rent and trying to save for a deposit at the same time,” Koulizos said.
“Once the deposit is saved, the mortgage repayments start. In the beginning, these are often higher than the equivalent rent that would need to be paid on the same house, but as time goes on, rents increase, and mortgage repayments stabilise, which means making the mortgage repayment becomes easier than paying rent.”
“It is always much better to purchase in a price bracket which will enable them to comfortably make mortgage repayments, including having the cash flow for other costs, such as council rates and body corporate fees, as well as for repairs as they arise,” McDougall concurred.
She also said that working with a team of property experts, such as professional mortgage brokers or buyers’ agents, can expedite the first home-buying experience.
Can you time the market?
Australia’s home prices are at record highs. A common investment ‘maxim’ is to buy low and sell high.
When it comes to property, the rule is to buy when you can.
Nevertheless, you’ve never made such a hefty purchase in your life. You don’t own stocks, you have no idea what an ‘ETF’ is. You need professional advice. So you log onto Reddit and ask the experts there.
Most likely, people will tell you the same: to buy when you can. But every now and then, you read a moderately upvoted comment here and there by Somebody McSomebody prophesying an imminent and udder collapse of the Australian housing market like the American subprime mortgage crisis.
The question stands: Should you buy at record highs?
“Timing the market is speculation, plain and simple.”
Nicola McDougall, PIPA
“The best time for anyone to purchase is when they are ready to do so financially,” McDougall said.
“It doesn’t matter if you buy your first home when market conditions are soft, flat, or firing because owning property is a long-term investment.
“What matters is actually buying one when you can.
“Unfortunately, there are many, many stories of people ‘waiting for the perfect time’ and then not purchasing anything because prices started to rise and their deposits were no longer big enough.
“The key to buying your first home is simply to purchase as soon as you are in the financial position to do so.”
“If you plan to buy and hold for the long term, you should buy as soon as you can. On average, house prices increase at 7% to 8% per year, so the longer you put off buying a house, the harder it is to buy,” Koulizos said.
“Timing the market sounds great but it is almost impossible to do. We only know about the peaks and troughs in the market once they have occurred.
“We say that ‘we should have bought our house then’ or ‘we should have sold then’ but this is after the fact.
“It is very difficult to forecast what the Australian residential property market will do as there are so many factors that influence the market. After 40 years of experience in the property market, I don’t know anyone who has got their forecasts correct 100% of the time!”
“The best time to buy a property is when you can afford to. Even experts try to ‘time the market’ and get it wrong,” Edge echoed.
“It is about buying the best asset you can get when you can afford to buy.”
Lloyd Edge, Aus Property Professionals
“Consider this: when everyone else is sitting around, waiting for the market to improve, you will have the pick of the market because this is actually the best time to buy a property.
“Doing the opposite of everyone else can be a good sign when buying property. If you are buying while others are on the sidelines, you will get more choices, have more negotiation power, and have more time to complete your due diligence, etc.
“When those on the sidelines decide the conditions are better and want to enter the market, the competition will increase, driving up prices, and you will lose your upper hand in negotiations. This is when we start to see properties start to ‘fly off the shelves’ as buyers get a fear of missing out.
“I would also be very mindful of who you take advice from when buying property. It seems that everyone these days is an ‘expert’ on the property market, including your family, friends, next-door neighbours, and even someone’s long-lost uncle will have some advice for you.
“Unless they are seasoned professionals, I would be very cautious about whom to take advice from. This is because the property market is constantly changing, and it will be a very different market today than when your parents bought over 20 years ago, and even very different from when your friend bought their home 12 months ago!”
