‘Very onerous’: The huge hurdle facing first home buyers

The property downturn has barely made a dent in the sky-high deposit required to purchase a first home, new analysis shows.

Some first home buyers who cannot achieve a standard deposit are instead buying with a small one in a falling property market – which might put them at risk of negative equity – or turning to their families for financial help.

In Sydney, where the median house price is above $1.464 million, a 20 per cent deposit is almost $293,000. The sum is sky-high despite Sydney house prices falling 8.3 per cent from their peak, on Domain data.

In Melbourne, the median house price is more than $1.028 million, meaning a 20 per cent deposit is more than $205,000 – even though the market is down 6 per cent from its peak.

To buy the median unit, a 20 per cent deposit would be almost $151,000 in Sydney or more than $112,000 in Melbourne.

Even in more affordable capitals, buyers would still need a deposit of $162,000 for a Brisbane house or $129,000 for a house in Perth.

The figures exclude transaction costs and stamp duty. NSW first home buyers can now choose to pay an annual land tax instead of the upfront stamp duty burden, reducing the amount they need to save, although the deposit hurdle remains high.

Buyers also face rising monthly mortgage repayments as the Reserve Bank lifts the cash rate to tame inflation. The value of loans to first home buyers fell 26 per cent in the year to September, Australian Bureau of Statistics figures show.

“The deposit required is still very high,” AMP Capital chief economist Shane Oliver said.

“We’ve really only gone back to where we were – depending on which property you’re looking at – back to the middle of last year or somewhere. It’s still very onerous, the amount that’s required that you need to save for.”

He said the NSW stamp duty change had also eased the burden somewhat, but this had not solved the fundamental problem.

Although Baby Boomers and Generation X faced high interest rates, property prices were not as high.

“Your deposit hurdle was nowhere near as great. It enabled people to get into the property market,” he said. “They’d have that interest rate burden up front, then interest rates fell.”

Faced with a high deposit gap, many first home buyers are looking for alternatives.

Mortgage broker Chris Foster-Ramsay said the way buyers assembled a deposit was “chalk and cheese” compared with five or 10 years ago.

“Where there’s clients that are really set on a 20 per cent deposit, there’s usually some level of family assistance there, whether it be a gift or an inheritance,” the principal broker at Foster Ramsay Finance said.

“The clients will have saved a lot, but there will be a deposit match from family to a certain extent in most cases.”

Some savers buy with a 10 per cent or 5 per cent deposit and either pay lenders’ mortgage insurance or use a federal or state first home buyer scheme that allows low-deposit purchases but waives LMI.

There is a risk in a falling market that low-deposit buyers could end up in negative equity, where they owe more on their home loan than their property is worth. Foster-Ramsay suggested low-deposit buyers look for established properties in well-connected areas, in terms of infrastructure and location, rather than buying off-the-plan or house and land packages.

Equilibria Finance managing director Anthony Landahl said even though the deposit gap is reducing as property prices fall, saving a deposit remains one of the biggest challenges for first home buyers.

“One of the most important things for first home buyers is to educate themselves around some of the state and federal government initiatives to assist first home buyers,” he said.

“They make a massive difference to the deposit and the requirements around the deposit. It still remains one of the biggest challenges.”

He welcomed the choice to opt out of stamp duty in NSW, allowing buyers to use funds that would have been put aside for taxes on their deposit instead. But he also warned first home buyers had been hit by rising mortgage costs.

“Even at a 5 per cent deposit, getting into the Sydney or Melbourne markets can be a challenge for some first home buyers,” he said.

That might be a deposit of $50,000, “which can take some time to save”.

He said low-deposit buyers need to be able to service their loans, and he has been working with clients on savings plans to purchase or repayment plans to build up equity.