First home buyers face mortgage stress in every capital city, except one

First home buyers would be in mortgage stress if they bought even an entry-level house, new modelling shows, and experts say that’s if they’re able to get a loan at all.

A couple who bought an entry-level house would spend 57.6 per cent of their income on mortgage repayments in greater Sydney and 42.7 per cent in greater Melbourne, Domain’s First Home Buyers report, released on Thursday, showed.

An entry-level house is defined as the bottom quartile of the market, priced at $990,000 or less in Sydney and $670,000 or less in Melbourne. In practice, buyers would need to move to a far-flung location to find a house at this price.

The modelling assumes both members of the household earned the city’s average income for 25- to 34-year-olds and had a 20 per cent deposit.

First home buyers would be spending 46.4 per cent of their income on repayments in Brisbane, 45.9 per cent in Adelaide and 37.3 per cent in Perth. The ABS considers households to be in housing stress if they spend more than 30 per cent of their income on housing.

Domain chief of research and economics Dr Nicola Powell said mortgage stress was becoming more of an issue for first home buyers.

“When you backtrack to 2019, it was only entry-level homes in Sydney and Melbourne that were in mortgage stress,” she said. “But now all cities except for Darwin are in mortgage stress.

“I think it shows how challenging that outlook is … the pressure of being able to meet that repayment over time is dire.”

Sydney brokerage Atelier Wealth’s managing director Aaron Christie-David said it would be hard to find homes in the NSW capital for under $1 million.

“I’d be struggling to find something in Sydney. You could probably do Campbelltown or Blacktown, the Central Coast,” he said. “We’re down north of Wollongong way, and even here you’d be struggling to find a freestanding home.”

Christie-David thought a 20 per cent deposit was unnecessary, despite the added cost of lender’s mortgage insurance. He said most first home buyers would be unable to get a loan for that amount, even with a reduced deposit.

“You’re probably falling short,” he said. “You may have a deposit, but now you have a borrowing capacity issue.”

Melbourne’s Foster Ramsay Finance director, Chris Foster-Ramsay, said a budget of $670,000 restricted buyers to the edge of the city. “If you start in Ringwood, you might end up in Healesville. You might start on one side of the Yarra Ranges and end up on the other.”

Both brokers said first home buyers would typically accept high mortgage repayments and make cuts to their household budget to buy, or would compromise by buying a unit or “rentvesting” – a strategy which involves renting to suit a lifestyle while owning a property that suits a budget.

Westpac senior economist Matthew Hassan said the threshold of mortgage stress might need to be reconsidered. “There’s a bit of an open question for what is the right threshold … first home buyers tend to have above-average income.

“It might be 50 per cent is not associated with severe stress. But if you think about the pub test … It’s a lot. That draws a sharp breath.”

Entry-level units were somewhat more affordable; the report showed repayments would make up 35.8 per cent of incomes in Sydney, 27.5 per cent in Melbourne, 34.4 per cent in Brisbane and 23.7 per cent in Perth. Prices ranged from $615,000 in Sydney to $437,500 in Melbourne and $410,000 in Perth.

Hassan said that while units were more achievable, they weren’t always as good at building wealth, and weren’t seen as viable homes for raising families.

“They come with all the other issues, build quality and slower appreciation over time is often a trade-off.”

The report found that it took six years and nine months to save for a 20 per cent deposit in Sydney, five years and one month in Melbourne, five years and six months in Brisbane and four years and six months in Perth. It was faster to save for a unit, no more than four years and four months.

They could save as fast as four years and three months in the Melton/Bacchus Marsh region of Melbourne’s outer west, or under six years in Wyong on the NSW Central Coast.

The calculations assume each partner saves 20 per cent of post-tax income every month in an online savings account.

Runaway house prices and high interest rates slashed affordability across Australia. Rapid price growth means houses could move further out of reach while buyers are scraping together a deposit.

The grim calculations have led to an increase in intergenerational wealth transfers, Powell said.

“When you look at figures like this you can understand why the bank of mum and dad has become such an important lender.”