Is It Easier To Buy Your First Home Today Compared To 1979?
We hear people all the time complain about how housing is so unaffordable for the next generation. I agree and wish that there were fewer barriers to enter the market. But is more unaffordable or not?
It is a complex topic and so I want to give a balanced view and comparison to what our parents as baby boomers had to go through to buy a home.
My parents purchased their home in 1979 in Blackburn South. At the time the population of Melbourne was 2.8m and as they were 16km east of the city it was out in the sticks.
These days the population of Melbourne is 4.4m or 60% more than 1979. Therefore as a fair comparison is to push out a further 9km east which puts you in the suburb of Ringwood East.
Here are four comparisons of owning a home today compared to 1979.
To have a fair understanding, of the amount of money that is being spent on a home, firstly we need to compare wages. My parents are teachers who are middle-income earners so I will use their profession as a comparison.
In 1979 Dad recalls that his income was about $12,000 per annum as third year teacher. Mum was also a teacher and was earning about $8,000.
Teachers these days in their third year can expect to earn $60,000 per annum.
My parents paid $35,000 for a three-bedroom home with purple carpet and purple walls. Whilst over the years they extended and improved the home, if it was in the same condition as they purchased it in 2016 the value would be approximately $850,000.
A comparable home in Ringwood East would be $700,000.
In 1979, $3,500 would need to be saved plus maybe $1,000 in stamp duties and fees. As a percentage of wages earned by my parents that is about 25% of their combined wage. Assuming that they live at home and save hard this should be achievable within a 12-month period. Even if property prices were to go up, not a lot of extra time would be needed to save.
Today a $70,000 deposit would be needed, plus $35,000 in stamp duty and another $5,000 minimum in lenders mortgage insurance, all in all $110,000. If a couple were earning $60,000 each, they would receive a combined income of $96,000 after tax. Saving $110,000 would most likely take three years but for very good savers could be achievable in two years.
Mortgages & Interest Rates
Today we are experiencing all time interest rates lows, but does this make owning a home more affordable or just push up prices? Loan lengths have increased significantly. Banks want us to be tied to debt and they have devised a system to keep us as interest paying customers for life.
In 1979, loan terms were a maximum of 15 years and often home owners with a lower wage to loan repayment ration could afford to pay this off early. The home loan interest rate was approximately 10%, and by 1985 had risen to 17%.
As a result repayments would have significantly increased whilst housing prices stayed about the same in this 6-year period. As long as my parents could keep up the increased repayments, by their early forties they are outright homeowners.
Banks have wised up to this and now offer longer terms, which changed the ballgame and increased what buyers could pay for a home. Here is one scenario using an online calculator from one of the major banks to compare borrowing capacities of our couple earning a combined $120,000.
15-year loan at 5.88% borrowing capacity $755,000. Total repayments over the life of the loan are $1,137,960, which includes $382,960 in interest repayments to the bank. On average the bank profits $25,530 from this loan per annum.
30-year loan at 5.88% borrowing capacity $980,000.Total repayments over the life of the loan are $2,088,000, which includes $1,108,000 in interest repayments to the bank. On average the bank profits $36,955 from this loan per annum.
The banks are not stupid and despite all time interest rate lows by stretching the length of a loan they are making a killing whilst adding to the problem of housing being unaffordable.
The result is that the odds really are stacked against the first homebuyer. Their wage to home value ratio makes it harder to enter the market to start with. Once they enter the market they literally spend most of their working life paying off the home until their late 50’s early 60’s.
As the bank terms are twice as long, values increase and time to own the home it twice as long as their parents. The conditions really are set up to widen the gap so the rich get rich and the poor get poorer.
03rd February, 2016