How much first home buyers really need: Cameron Kusher
The never-ending conversations around housing affordability, particularly around how millennials will get a head-start on the property ladder, has seen a whole raft of suggestions thrown at a possible solution.
I have chosen a 25th percentile price for this analysis which reflects prices at the more affordable end of the housing market and is often more representative of the prices at which first home buyers are looking at to enter the market.
Keep in mind certain states have stamp duty exemptions which exist below specific price thresholds.
For this analysis, we have assumed that the first home buyer is purchasing at the 25th percentile price for owner occupation.
City x city stamp duty requirements:
- Sydney - $25,733 for houses and $273 for units
- Melbourne - $11,553 for houses and $8,507 for units
- Brisbane - $1,043 for houses and $845 for units
- Adelaide - $16,046 for houses and $12,622 for units
- Perth - $422 for houses and $402 for units
- Hobart - $9,302 for houses and $7,266 for units
- Darwin - $7,557 for houses and $6,337 for units
- Canberra - $15,107 for houses and $8,303 for units.
It’s a common misconception that in order to purchase a home you need a 20% deposit.
Whilst a 20% deposit is beneficial it is not a necessity however, if you have a deposit of less than 20% most lenders will require you to pay lenders mortgage insurance (LMI).
LMI can be paid up front or capitalised into the loan repayments.
Either way, if a buyer is required to pay LMI, it will result in higher mortgage repayments or a larger up front deposit.
This analysis has made no provision for LMI costs.
The cost of the deposit along with the stamp duty in each capital city for deposits of 5%, 10%, 15% and 20%, remembering that the stamp duty cost is fixed so the cost increases highlighted reflect the greater savings required for a larger deposit.
Saving for a deposit, even a 5% deposit, is a much tougher task in Sydney and Canberra than it is elsewhere in the country.
A 5% deposit on a house in Sydney requires $59,033, in Canberra it requires $41,357 while the deposits required for a house in all other capital cities except for Adelaide ($32,921) is less than half of the deposit required in Sydney.
Another challenge for potential first home buyers, particularly in Sydney and Melbourne is that household incomes are not growing at the same pace as dwelling values.
Over the 12 months to April 2017, Sydney dwelling values have increased by 16.0% and Melbourne values are 15.3% higher.
Modelled household income data from the Australian National University (ANU) indicates that over the 12 months to March 2017 Sydney household incomes have increased by a comparatively lower 4.6% and Melbourne household incomes are 2.7% higher.
Entry into the housing market remains a real challenge, particularly in our largest and most expensive capital cities.
Even in cheaper areas, household income growth is fairly slow which makes saving a deposit difficult.
It is unclear as to how, absent a big fall in property prices, housing affordability for first home buyers can be greatly improved.
Governments have tried incentives such as grants in the past and they generally just lead to greater demand and higher property prices.
The future onset for the housing affordability challenge over the coming years could potentially create greater social pressures where our youth may look to move away from the commercial hubs of Sydney and Melbourne because housing costs are too high.
Added to this, businesses may find it increasingly difficult to attract young talent unless they offer opportunities in areas where housing is more affordable, both from a purchase and rental perspective.
Cameron Kusher is research analyst for CoreLogic. You can contact him here.