Mortgage forms

Maybe, just maybe, Australian twenty-somethings can start thinking about buying a home. We've crunched the numbers to see how far house prices would need to fall for home ownership to be possible IF interest rates stay reasonable.

First, let's assume the buyer spends no more than 30% of their income on servicing a mortgage. That allows for a comfortable lifestyle. So for, say, a Sydney buyer wanting to buy a median priced house for around $1m, at Westpac's current variable interest rate of 5.38% this would mean repayments of $1400 a week. If that repayment were 30% of the person's income they would need to be earning $4666 per week and paying no tax -  $242,666 gross annual salary. The median Australian annual salary is $66,000. Sydney, we have a problem!

Let's dial things down a bit.  Assume the person is in a couple relationship and the household income is the Australian median, around $87000 annually, $1673 per week. They want to buy an apartment, not a house, in a capital city but not Sydney. They can expect to pay around $550,000. Let's further assume their parents have put in some money, or they have forgone living like fun-loving twenty-somethings and have a $100,000 deposit. They also qualify for the first home owners grant of $10,000. They are down to needing to borrow $440,000, but the costs of buying will cancel the $10,000. So we can say they need to borrow $450,000. Stay with me. 

We find a rate better than Westpac's standard variable, let's say 5%. Now the repayments are down to $600 a week. That would mean a household weekly income of $2000 for the couple to be comfortable. $100,000 per year. Still not happening on 30%, but let's see what happens without restaurants, nice cars and overseas trips.

Assume they are prepared to budget and spend a full 50% of their income on the mortgage. The household income would need to be $1200 per week for a $600 repayment to be 50% of income. $1200 per week is $62,400 per year. Doable! So long as you have $100,000 lying around and don't want to live in Sydney. 

With the equation so far, let's say they do want to live in Sydney. The median apartment price is more like $660,000 in Homebush - a suburb that is fairly close to the CBD. The median house price in Homebush is $710,000. Weekly repayments for a house would be $819; for an apartment $752. This represents 45% of their income for an apartment, 49% for a house. It's probably doable, provided that:

  • The couple stay together
  • They both keep their jobs that pay around $55,000 each, before tax ($45,000 after tax)
  • They had that $100,000 for a deposit
  • Interest rates stay around 5%

It would be great for their ownership prospects if:

  • House prices drop (before they buy) by the projected 5% or so in the next few months  
  • Interest rates fall
  • Wage growth picks up
  • Banks, post-Banking Royal Commission, relax their tightened lending policies, and
  • They don't have babies!

A lot of unknowns, but it looks like younger people with good employment prospects can dare to dream, even in Sydney, of home ownership.

Casual and gig economy employment, by the way, would make it much harder to get a home loan. See our article The gig economy - winners and losers.

For an alternative view see Locked out: It’s all gone horribly wrong for generation rent


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