With soaring property prices, high interest rates and inflation, the viability of the great Australian dream has come into question for younger generations.
Entering the property market is the most difficult it’s been in three decades, according to the latest PropTrack Housing Affordability Report.
The trifecta of rising property prices, inflation and interest rates has created a perfect storm for property inaccessibility, especially for first home buyers.
Housing affordability is affecting a huge amount of young people, especially those looking to buy their first home. Picture: Getty
PropTrack Senior Economist, Paul Ryan, says this deterioration in affordability, coupled with the struggle to save for a deposit amongst boosting home prices, has created a formidable barrier to entry into the housing market. Hey
“The average household could only afford 13% of all homes sold over the 2022-2023 financial year, showcasing the difficulties typical households face in affording a home now,” Paul says.
This comparison underscores a drastic change from the 1990s, a time when the economic landscape allowed a broader segment of the population to access the housing market.
This begs the question – who had it tougher?
Because, for many young Australians looking to enter the property market, this data highlights a harsh reality: is the dream of owning a home still viable?
4 differences between Boomers and Gen Z
1. Property prices
By June 2023, Paul says households could afford the smallest share of homes since PropTrack records began in 1995.
While there was a slight improvement in the decade following the Global Financial Crisis, and a brief reprieve during the pandemic years of 2020 and 2021 when interest rates fell to record lows, Paul says the property correction was short lived.
“In say the late 1990s, if someone was buying a home and they had a median typical income, they could still afford 50% of homes sold,” he says.
“For that to deteriorate from 50% to 13%, it shows you just how much more difficult it is now, for a typical household on a working-class wage, to break into the housing market.”
Young families are also being hit hard by affordability, as it means they cannot afford the type of property for their needs. Picture: Getty
And rising interest rates aren’t the only driver. Paul says a shift towards more luxury listings is also seeing fewer homes in the affordable ranges hitting the market.
“Cheaper properties sell more regularly than more expensive properties so this fundamentally represents a deterioration in affordability.”
2. Interest rates
While interest rates peaked in the early 90s – when the official Reserve Bank cash rate reached an eye-watering 17.5% – Paul says the relative affordability of homes in comparison to household incomes still made the path to homeownership more attainable.
Conversely, in a post-pandemic world, historically low interest rates in 2020 and 2021 sent property prices skyrocketing.
Now, off the back of record lows, rising inflation has seen mortgage interest rates surge, with the RBA handing down 13 consecutive rate rises since May 2022.
This has caused the sharpest increase in mortgage rates since the mid-1980s, Paul explains, and has reduced borrowing capacities by as much as 30% for new borrowers making it “one of the toughest periods for housing affordability”.
“We calculated that if you were on the average income and you were buying an average-priced home, you’d be spending more than 30% of your wage on mortgage repayments,” Paul says.
“That exceeds the period in 2007, which was the previous peak, and is only a little bit below that really big peak in 1990 when interest rates were at those really high levels”.
It’s these bigger repayments and deteriorating affordability that mean younger people really need to think about what would happen should they become unable to make repayments due to illness or inability to work.
Things like personal insurance can give you peace of mind because you won’t be leaving you or your family high and dry should the unexpected happen – nor will you be worried about the roof over your head.
The up and down nature of the property market means anything can happen at any time. Protect yourself and your family with insurance. Picture: Getty
Most people can access insurance through their super. Insurance through super is like insuring your home or car, except you’re insuring something much more valuable – you! It can be your safety net in case you are temporarily or permanently unable to work.
With Spirit Super costs for any insurance are deducted from your super account each month. The cost of your cover depends on your age, the type and amount of cover you hold and your occupation rating.
3. Deposit amount
Soaring property prices makes saving a deposit a key barrier for first-home buyers.
According to the PropTrack report, it would take an average-income household more than five and a half years to save a 20% deposit on an average-priced home.
“When you think about previous generations when there were higher interest rates but lower prices, even if housing affordability was similar to today, it simply is the case that it takes you much, much longer now to save the deposit.”
Spirit Super Superannuation Adviser Rhonda Maden says younger people also have the additional burden of things like HECS-HELP debt, which is another ball to juggle when setting financial goals and priorities.
She also encourages young people to take advantage of government incentives, such as the First Home Super Save (FHSS) scheme, as well as the various state First Home Owner grants.
The FHSS works by allowing you to save money for your first home in your super fund by making voluntary contributions (both before-tax concessional and after-tax non-concessional).
Young people have a huge amount of options available when it comes to saving for a deposit – like the FHSS scheme. Picture: Getty
If you meet the eligibility requirements, you can have these voluntary contributions released, up to a limit, (along with associated earnings) to help you purchase your first home.
Rhonda says, “They can give you a real leg up on your savings,” especially when you factor in things like compound interest, which helps those small contributions add up over time.
4. Changing attitudes
While Boomers viewed property ownership as a secure path to retirement, younger generations face a market where this goal seems increasingly elusive, or will at least take a lot longer to achieve.
Rhonda says this different outlook might be influencing how generations approach financial planning and their overall investment risk tolerance.
“While older people may be more inclined to seek the safety and security of bricks and mortar, young people might be prepared to embrace other investment types, like putting more money into super.”
However, Rhonda says that if Gen Z are thinking of putting more money into their super, they need to consider their options when it comes to consolidating their funds and choosing sound investment options – two things that can have a big impact on your super balance retirement.
…But it’s not all doom and gloom for younger generations
For Millennials and Gen Z feeling disheartened by these generational disparities, the great Australian dream doesn’t have to be out of reach; it just requires a solid financial strategy.
“A good first step is to know where your money is coming from and where it’s going,” Rhonda says.
“You can’t control interest rates or property values, but you can definitely look into your savings and spending, so start there.”
But at the end of the day, home ownership is a long journey that takes time and perseverance – so try and try again, and don’t become disheartened if it takes longer than you’d like.
Because as Rhonda says, “If you don’t start, you’re never going to get there.”
