Can home buyers still achieve the Great Australian Dream?

They say the Great Australian Dream is to one day own your own home. Made popular by films like The Castle, and the topic of most millennial conversations, home ownership is meant to offer a sense of security and showcases a level of success.

But after decades of higher house prices compared to wage growth, paired with cost-of-living pressures, is this dream still achievable?

Nowadays saving up for your first property is considerably harder than it was in the past. But that doesn’t mean it’s impossible. In fact, there are many ways that homeowners can put the odds back in their favour.

Let’s explore why achieving the Great Australian Dream has become more challenging, and how first home buyers could still be able to get a foot on the property ladder.

 

Why does it seem so much harder to buy property?

New research by the Property Council of Australia found that four out of five aspiring Aussie homeowners believe the dream of homeownership is unachievable.

Meanwhile, the latest Australian Bureau of Statistics (ABS) data for Lending Indicators shows that the number of first home buyer loans for owner-occupiers has fallen by 34.3% in April compared to the same time a year ago.

It’s safe to say that it’s a difficult time to save up a deposit for a property in Australia – so much so that first time buyers are retreating in the wake of sky-high property values. So, why does it seem so much harder to buy property?

 

1. Inflation levels

Most things – not just real estate – are more expensive at the moment as a result of higher annual inflation due to the impacts of the Russian war in Ukraine and global supply chain issues. Over the twelve months to the March 2022 quarter, the CPI rose 5.1% – the highest level recorded since the 1990s.

If you’re trying to save up for a home loan deposit and the cost of your weekly grocery bill is increasing along with a myriad of other expenses, it’s going to be harder to grow your savings. This can be where performing an audit on your current spending and upgrading your budget may be worthwhile.

 

Reduce Home Loans Budget Calculator can help you better understand your cash flow so you can reduce your expenses where possible and direct more cash to your deposit savings.

 

2. Wage growth vs property prices

In 2021, Australian property values increased ten times faster than wages, according to CoreLogic figures. While wage growth increased just 2.3% (ABS data), property prices skyrocketed by 22.1%, thanks to a housing market boom. When property prices are growing considerably faster than wage growth, paired with higher cost-of-living pressures, it’s simple maths to say that saving up for a deposit is harder.

It’s important to acknowledge the affordability barrier of purchasing a home so first home buyers and governments can work to overcome it. Sentiment around purchasing property for young people and those in lower socio-economic brackets is going to be even lower when capital cities require home buyers to save up six-figure deposits.

Government assistance schemes (explained below) can offer a helping hand for these Australians in times when deposit requirements seem impossible.

 

3. Interest rates

Another barrier worth keeping in mind is that Australians previously experienced a long period of falling interest rates, thanks to the Reserve Bank of Australia cutting the cash rate for 11.5 years.

When borrowing for a home loan is more affordable through lower interest rates, it often means homeowners can be approved for bigger loan amounts. This in turn can influence property prices to rise, as greater access to credit means higher spending limits and an increase in demand.

The good news is that now that interest rates have been lifted again in an effort to combat inflation, economists have forecast that this should help to put downward pressure on the property market. Some have suggested it may “crash” the market by as much as 25%. Put simply, home prices may become more affordable if buyers cannot afford huge home loans anymore.

How the Great Australian Dream can still be achieved

Now you understand some of the barriers in place preventing everyday Australians from purchasing their first home, it may be easier to identify ways to work around or overcome these issues.

 

It’s worth noting that no amount of skipping dinners with friends and denying yourself life’s little luxuries can “fix” a budget like increasing your income. Where possible, it may be worth speaking to your manager and negotiating a pay rise, or looking for secondary income opportunities, such as freelance work related to your skills.

That being said, here are some of the ways that first home buyers may be able to get over the affordability barrier and be able to purchase property in Australia.

 

  • Government affordability schemes

Housing affordability is a significant issue amongst the population, which is why governments work to create housing affordability schemes to help buyers gain home loan approval or purchase/build property with smaller deposits.

There are a multitude of home buyer schemes available, including:

  • First Home Loan Deposit Scheme – the government acts as a guarantor on your home loan allowing you to purchase an existing dwelling with a deposit of as little as 5% without paying Lender’s Mortgage Insurance (LMI).
  • New Home Guarantee – the government acts as a guarantor on your home loan allowing you to purchase a new property with a deposit of as little as 5% without paying LMI
  • Family Home Guarantee – the government acts as a guarantor on a home loan for single parents only, allowing you to purchase a property with a deposit of as little as 2% without paying LMI

The newest federal government assistance scheme is Labor’s Help To Buy scheme, which is specifically designed to help first home buyers earning low to average incomes. A promise from the last federal election, this is a shared-equity scheme, in which the government assists buyers by contributing to the cost of 30% of an existing home or 40% of a new home.

Eligible buyers will only need a deposit as little as 2%. Help to Buy will be available only to Australians with a taxable income of up to $90,000 for individuals and $120,000 for couples.

 

  • Consider reinvesting

Another option worth considering is reinvesting. This is an investment strategy in which home buyers choose to purchase more affordable property in a cheaper growth suburb while still renting in their ideal suburb.

This allows first home buyers to get a foot on the property ladder faster and earn a passive income through leasing the property to repay the mortgage, while maintaining the same lifestyle or proximity to work that would be lost if you lived in the property.

Keep in mind that most government assistance schemes are for owner-occupiers only. If you still want to qualify for these schemes, you may have to live in the property for 6-12 months before renting it out.

  • Choose a competitive lender

Saving up a deposit is only one piece of the home ownership pie. Another factor first home buyers may want to consider is how much they may be approved to borrow for a home loan. And starting with a competitive home loan lender may put you in a better position to gain home loan approval.

With the days of rock-bottom home loan interest rates over, it’s crucial that first home buyers consider who they take out a home loan with just as carefully as they consider their first property purchase.

Lenders will look at your financial situation when assessing your eligibility for a home loan. This process also includes assessing how much you could afford to repay on a mortgage, based on a higher-than-advertised interest rate. This rate is called the buffer rate, and is typically 3% higher than the lender’s ongoing variable rate.

This buffer rate may be higher or lower depending on the lender you apply with. So, starting your application with a competitive lender that offers lower interest rates may help your chances of approval.

Reduce Home Loans helps to make the Great Australian Dream more achievable for first home buyers by offering some of the most competitive rates around. First home buyers can compare interest rates starting with a ‘2’ and help keep their future mortgage repayments affordable.

 

  • Consider bridesmaids suburbs and new locations

Speaking of affordable locations, one of the other factors to consider as a first home buyer is that it is called a property ladder for a reason – you’re meant to climb it.

It’s unrealistic to expect that you’ll purchase your perfect home for your first property. This is why it may be worth looking in suburbs nearby to your dream location that may be more affordable. This allows you to find a home that could be in your price range while still being close to your preferred suburb.

Further, you don’t just have to look in the city or town you grew up in. There’s a reason so many Sydney and Melbourne home buyers have fled their expensive cities and migrated interstate – particularly to Queensland. And if you don’t want to move, you could use this as a first investment property while you save up for a home in your ideal area.

  • Relying on family

A recent news.com.au article noted that 60% of first home buyers had financial assistance from their parents in 2021 to purchase property. Home loans from the ‘bank of mum and dad’ totaled $34 billion last year alone.

Turning to parents for support is a popular option for first home buyers right now. If you and your family are in the financial position to do so, it may be worth considering a guarantor home loan for your first property.

This is where parents ‘guarantee’ a portion of your deposit (typically up to 20%), or the entire property value, by using the family home or another asset as security on your mortgage. This may boost your chances of home loan approval and save you having to squirrel away a 20% deposit.

For renters, you may also want to consider moving back with family if this is possible as you will be able to boost your saving power by hundreds of dollars a week.

 

No, the Great Australian Dream of homeownership is not dead. First home buyers today are just unfortunately purchasing in a more challenging market than, say, their parents or grandparents had to contend with.

By understanding the barriers to home ownership, first home buyers may be able to work on strategies to overcome them, including taking advantage of government or family support, comparing low-rate lenders and looking at more affordable areas.

 

Any statements are general in nature and do not take into account your financial personal situation, objectives or needs. You should consider whether any statement/s is suitable for you and your personal circumstances. Before making any financial decision, consider your circumstances and the product disclosure statement.

 

 

 

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(29)    For the Rate Cutter Variable where the borrower pays $1170 upfront fees then a corresponding loyalty discount of 0.10% p.a. off the Rate Cutter Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(27)    For the Investor Rate Slasher Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Slasher Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(26)    For the Low Rider Cash Back Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(25)    For the Economizer Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Economizer Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(24)    For the Super Saver Cash Back Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.10% p.a. off the Super Saver Cash Back Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(23)    For the Super Saver Variable where the borrower pays an upfront fee of $1170 then a corresponding loyalty discount of 0.15% p.a. off the Super Saver Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(22)    For the Economizer Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.11% p.a. off the Economizer Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(21)    For the Investor Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(18)    For the Home Owners Dream 1 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(20)    For the Cash Back Hero Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Cash Back Hero Variable (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(14)   For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(12)   For the Investor Rate Lovers Interest Only where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.07% p.a. off the Investor Rate Lovers Interest Only rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(11)   For the Wealth Maximizer 3 year fixed Principal & Interest where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(10)    For the Wealth Maximizer 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Wealth Maximizer reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(9)    For the Home Owners Dream 3 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(8)    For the Home Owners Dream 2 year fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the Home Owners Dream reverted variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(7)    For the Investor Rate Slasher where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.09% p.a. off the Investor Rate Slasher rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(6)    For the Investor Rate Buster Variable where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.08% p.a. off the Investor Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(5)    For the Rate Buster Variable where the borrower pays an upfront fee of $150 then a corresponding loyalty discount of 0.05% p.a. off the Rate Buster Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(4)For the Rate Slasher Variable where the borrower pays an upfront fee of $1,170 then a corresponding loyalty discount of 0.08% p.a. off the Rate Slasher Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(3) For the Investor Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Investor Rate Lovers Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(2)For the Rate Lovers Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Rate Lovers Variable rate (at that time)  will automatically apply after the 5th anniversary of the loan.  These fees and loyalty discount are factored into the comparison rate.  The loan setup fees are not refundable.

(1) For the Low Rider Variable where the borrower pays $0 upfront fees then a corresponding loyalty discount of 0.06% p.a. off the Low Rider Variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(28) For the Rate Crusher 1 Year Fixed where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.05% p.a. off the Rate Crusher reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.

(19) For the 1 Year Fixed Wealth Maximizer where the borrower pays an upfront fee of $697 then a corresponding loyalty discount of 0.20% p.a. off the 1 Year Fixed Wealth Maximizer reverted variable rate (at that time) will automatically apply after the 5th anniversary of the loan. These fees and loyalty discount are factored into the comparison rate. The loan setup fees are not refundable.