Paying off a mortgage has become easier in most capital cities via @domain

Paying off a new mortgage on an entry-level home has become easier in most Australian cities due to falling property prices and low interest rates.

Using a mortgage serviceability measure, Domain has calculated that a typical household buying an entry-level property can avoid mortgage stress (paying more than 30 per cent of income on a mortgage) in all capital cities.

Despite lower mortgage serviceability, low-income earners are still bearing the brunt of Australia’s housing affordability problem, with many struggling to afford rent, particularly in our capital cities. And due to high prices and rents, housing affordability remains one of the top concerns among Australians.

Most measures of affordability show that it’s harder to buy a house

Property prices have skyrocketed

Combined capital city median house prices have increased by 40 per cent since 2010, and unit prices have increased by 30 per cent. In Sydney and Melbourne, house prices have increased by even more.

Prices have been growing faster than wages

Wages have not kept up with escalating property prices. The property price-to-income ratio for Australia increased from about three (meaning the typical dwelling cost three times average household income) to five over the past 20 years. For NSW and Victoria, the ratio increased from about 3.5 in 2000 to 5.5 in 2019 (but had fallen back from over six in 2017). Housing costs as a share of income are higher in Australia than in most comparable countries.

The time taken to save a deposit has increased

The time first-home buyers need to save a deposit has risen significantly due to weak income growth and risingproperty prices. According to Domain’s 2019 First Home Buyers Report, the time taken to save a deposit for an entry level house in Sydney is more than six years, and three and a half years in Perth. The time to save a deposit has increased substantially over the past decade.

Many households struggle to pay rent

Renters also face affordability challenges. About half of low-income renters are in “rental stress” (meaning rent accounts for more than 30 per cent of household income). At a national level, rents have grown in line with wages, but much faster than inflation, as has Domain’s measure of asking rents.

Mortgage serviceability paints a better picture for buyers

Calculating mortgage serviceability is another way to consider housing affordability as most first-home buyers take out a mortgage to buy a home. We calculate mortgage serviceability for a hypothetical first-home buyer as the initial mortgage repayments on an entry-level property (a house or unit at the 25th price percentile) for a buyer with a 20 per cent deposit, expressed as a percentage of household income (see the Appendix for more detail).

This mortgage serviceability measure takes into account interest rates, which impact mortgage repayments and so are an important element of affordability. Housing affordability looks better when considering mortgage serviceability, as low interest rates have offset higher property prices (but are also a contributor to higher prices).

A household is generally considered to be in “mortgage stress” when mortgage repayments are greater than 30 per cent of income, with this measure particularly relevant for lower-income households.

On the mortgage serviceability Domain has calculated, an average household buying an entry-level property can avoid mortgage stress in all capital cities. However, low-income households and those looking to buy a more expensive house (particularly in Sydney and Melbourne) are likely to find themselves facing mortgage stress.

Paying off a mortgage has become easier in most cities

Sydney is Australia’s most unaffordable city according to the mortgage serviceability measure, as it is on most measures of housing affordability. The mortgage burden for a first-time house buyer peaked in mid-2017 at 31 per cent due to rising house prices, but has now fallen back to where it was in 2015 and is a bit above the average of the 2000-2019 period (see graph). For an entry-level unit, affordability has also improved since peaking in 2015. As further property price falls and lower interest ratesare likely, mortgage affordability may continue to improve in 2019.

Mortgage serviceability for an entry-level house in Melbourne fell in 2018 and into 2019 due to declining property prices, and is now sitting below peaks in 2008 and 2010. However, serviceability is still well above where it was in 2013 and above the 2000-2019 average of 21 per cent. For units, affordability has steadily improved since 2010 and mortgage serviceability is now below 17 per cent. As with Sydney, Melbourne property prices are likely to fall further in 2019 and in combination with a likelihood of lower home loan rates, this will improve mortgage serviceability further.  

In Brisbane, the mortgage serviceability measure for an entry-level house has remained around 17-18 per cent since 2012. Mortgage serviceability was highest in early 2008, before mortgage rates fell significantly after the RBA cut rates. For units, mortgage affordability has steadily improved since 2010 and the mortgage burden is now below 14 per cent.

Similarly, mortgage serviceability in Adelaide has hovered about 16-18 per cent for a house and 11-13 per cent for a unit since 2013. On Domain’s serviceability measure, Adelaide has consistently been the second or third most affordable city over the past two decades.

Mortgage serviceability for Hobart and Canberra houses has increased over the past three years due to rising property prices. But despite Hobart’s property boom, where house prices have shot up 40 per cent since 2015, paying off a house in Hobart is still very affordable compared to the mainland capitals (although less so for units). In Canberra, it’s relatively expensive to service a mortgage on an entry-level house because cheaper houses are not available at bargain prices in the nation’s capital. But due to unit prices not growing and lower interest rates, servicing a mortgage on a Canberra unit has become easier, with the serviceability measure falling from 21 per cent in 2010 to 13.5 per cent in 2019.

In contrast to Hobart and Canberra, mortgage serviceability for an entry-level house and unit in Perth has fallen substantially since 2010 due to a combination of weak earnings growth, lower interest rates and lower house prices. Mortgage serviceability in Perth is now well below the 2000-2019 average for both houses and units.

For an Australian (combined capital city) entry-level house, mortgage serviceability has remained fairly steady over the past few years, but is higher than five years ago. For units, affordability has improved significantly since 2010.

The mortgage serviceability measure doesn’t tell the whole story

Housing affordability for first-home buyers looks better when using a mortgage serviceability measure compared to just looking at prices or the time needed to save a deposit.

However, the serviceability measure used in this article does disguise problems for people on low incomes, unemployed people and single-earner households.

Higher interest rates would also worsen serviceability, although this is unlikely to occur in the near future with interest rates likely to fall. If weak wages growth continues, this will also make it harder to pay off a mortgage over time.

Addressing housing affordability will be an ongoing challenge

Paying off a mortgage has become easier in Sydney, Melbourne and Perth, and for Canberra and Brisbane units, due to a combination of lower prices, low interest rates and modest income growth. But in Hobart, and for Canberra houses, rising prices have pushed mortgage repayments higher.

While mortgage serviceability has improved in most capitals, affordability is still a major problem because high prices mean it is difficult for many households to save a 20 per cent deposit and many households that rent also face rental stress.

Appendix: How Domain’s mortgage serviceability measure was calculated

House and unit prices are the 25th price percentile for each Greater Capital City Statistical Area each quarter. A 25th percentile property is illustrative of the type of home a first-home buyer is likely to purchase (it is the “entry price” used in the Domain First Home Buyers Report). Note that the median price is the 50th price percentile.

Buyers are assumed to save a 20 per cent deposit, so the initial loan-to-valuation ratio is 80 per cent. This is consistent with the evidence that first-home buyers have saved close to a 20 per cent deposit for at least two decades (the main reason is to avoid paying for lender’s mortgage insurance).

Household earnings are average weekly earnings (ABS 6302.0, full time, total earnings) for each state/territory, multiplied by 1.5 (so this assumes a household has one full-time worker and one part-time worker). As earnings data is only available twice a year, the average of the two data points either side of the missing quarter is used. By using a state measure of earnings, the calculated mortgage serviceability may be pushed higher (as regional areas tend to have lower average incomes). The earnings measure also only includes employee income. On the other hand, this measure may overstate the ability of households to service a mortgage as we use average earnings (not median) and is before tax. Average earnings data was preferred to household income data from the Survey of Income and Housing as the earnings data is produced bi-annually and more recent data is available.

The home loan interest rate used is the variable, discounted, owner-occupier rate in RBA Table F5 for the period June 2004 onwards. For the years prior to 2004, the average gap between this rate and variable, standard, owner-occupier rate over the 2004-2010 period is deducted from the ‘standard’ rate. The three-month average is calculated for each quarter. A large proportion of mortgages have interest rates well below this indicator rate, so the mortgage serviceability measure in this analysis is likely pushed higher by using this interest rate.

The mortgage term is 25 years (300 monthly repayments).

Mortgage repayments are based on monthly repayments, with the repayment annualised to compare to annual income.

Source: Domain