Skyrocketing house prices inflame affordability worries

Skyrocketing house prices have rekindled worries about housing affordability, and market watchers are warning that Australians living on moderate incomes will find it increasingly difficult to achieve homeownership.

While record-low interest rates have made mortgage repayments more affordable and the government has introduced an array of programs aimed at home buyers, rising prices make it nearly impossible for some to save the required deposit, according to a report by Domain. The affordability issue is affecting all tiers of the market, from entry-level buyers to current owners looking to upgrade.

Figures released Thursday showed that house prices are at a record high in every capital city except Perth and Darwin, with median prices hitting $1.21 million in Sydney and $936,000 in Melbourne, according to Domain. That means a 20% deposit on a median-priced house would be $242,000 in Sydney and $187,000 in Melbourne.

“For essential workers and aspiring first-home buyers, the hurdles are harder than ever,” University of Sydney urban planner Professor Nicole Curran told Domain. “Unless the first-home buyers are in a high income bracket and so able to secure a loan – but they’ll be looking at very high repayments. If I was an essential worker trying to buy a home anywhere within striking distance of a major city, I’d be more disheartened than ever.”

Despite rising home prices, there has been a tsunami of owner-occupier buying in recent months as home seekers take advantage of lower mortgage repayments and government stimulus programs. Government incentives have helped some buyers to purchase homes with a 5% deposit while avoiding mortgage lenders insurance. Other programs offer stamp duty concessions and grants to build new homes.

Read more: House prices hit record highs – except in these two cities

First-home buying is at its highest level since the Global Financial Crisis, according to Domain. But Gurran said the stimulus has spurred purchases by higher income earners who already had the ability to pay substantial deposits.

“The question is whether those first-home buyers were then already heading towards homeownership anyway. I’d question whether the first-home buyer assistance made any difference over the long term,” she said. “If government is serious about addressing housing stress, they have to increase the supply of social and affordable housing.”

Shane Oliver, chief economist at AMP Capital, told Domain that low interest rates and government stimulus programs have distorted the housing market by preventing distressed sales and increasing demand.

“You could argue that it’s justified. Governments worry that if prices come down too much, that will create a panic and slow the economic recovery,” Oliver said. “[But] this was an opportunity to fundamentally lead to more afford able housing in Australia, and yet again we’re going to end up with more expensive housing.”

Hal Pawson, professor of housing research and policy at UNSW, said that if house prices keep rising while unemployment remains elevated, housing affordability for key workers and moderate-income households will be “more stretched.”

“For the last 10 or 15 years as interest rates have fallen, what that’s created is a bigger and bigger deposit barrier,” he told Domain. “Falling interest rates don’t help with the part of the price you’ve got to save. The way that lower interest rates are driving prices higher is pushing up the multiple of annual earnings that the typical buyer will need to save for a deposit.”