Mortgage affordability worst since 1990 for house buyers

2023-05-03

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In numbers

45.4 per cent – Share of household income needed to buy Australia’s median house.
61.8 per cent – Share of household income needed to buy Sydney’s median house.
44.4 per cent – Share of household income needed to buy Melbourne’s median house.
40.7 per cent – Share of household income needed to buy Brisbane’s median house.
30.1 per cent – Share of household income needed to buy Perth’s median house.

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House buyers are facing the worst mortgage affordability in more than three decades due to the fastest interest rate rises in a generation.

An average buyer today would need to pay 45.4 per cent of their household income to afford the median house, the highest level since the September quarter of 1990 when it was 45.5 per cent, BetaShares modelling found.

Mortgage affordability has worsened after 11 interest rate rises.Credit: Peter Rae

This has already overtaken the GFC-era level of 42.1 per cent in the March quarter of 2008.

The repayment burden is even worse in Sydney due to higher median house prices. An average Sydney buyer would need 61.8 per cent of their household incomes in the current quarter, worse than the GFC peak of 47.2 per cent and just 2.1 percentage points away from the record in the June quarter in 1990.

Melbourne buyers would face the highest repayments on record at 44.4 per cent of incomes in the current quarter – even worse than in the June quarter 1990 of 39.9 per cent and worse than the GFC-peak of 39.6 per cent.

Eleven rate hikes in the past year have pushed up monthly repayments and wiped out the benefit of the steepest fall in property prices on record. In practice, banks would not lend to a buyer facing very high repayments as a share of income, but the figures illustrate the challenge facing buyers aspiring to purchase an average house.

Brisbane buyers would need to pay 40.7 per cent of their incomes on the mortgage, still below the GFC peak of 44.4 per cent, while in Perth buyers would need 30.1 per cent, below the GFC peak of 44.8 per cent.

It would take two more rate hikes of 0.25 per cent each to push mortgage affordability to the worst on record, nationally and across all the capitals except for Perth, Adelaide and Darwin.

The modelling is based on median capital city house prices, the average combined after-tax income for a heterosexual couple, a 10 per cent house deposit and the average discount variable rate.

Even though the cash rate is nowhere near the 17.5 per cent it reached in 1990, house prices have soared relative to incomes since then.

The national median house price was about 3.1 times the average household income during 1990, and rose to a peak of 6.6 times in the March quarter of 2022. Despite the steepest property downturn on record, it remains at six times, almost double three decades ago.

Betashares chief economist David Bassanese said the mortgage burden for new home buyers is almost as bad as what the Baby Boomer generation experienced in the 1990s.

“While interest rates remain far lower than during the early 1990s … the reality is that the mortgage repayment burden today is almost as great, due to the large run-up in house prices relative to income over the past 30 years,” Bassanese said.

He said a rate rise, even from relatively low levels, packs a far greater punch on households because of the level of house prices relative to income and as a result, higher debt levels.

“Two more 0.25 per cent rate increases, taking the mortgage rate to around 7.5 per cent, would push the repayment burden to record highs – higher than even in mid-1990.”

Impact Economics and Policy lead economist Dr Angela Jackson said new home buyers were under a lot of pressure and some would face housing stress.

“There is no doubt households are going through difficult financial times, especially those who have entered the housing market in the last two years … they’re taking on much higher debt than the 1990s, which means much lower interest rates can cause housing stress than what occurred in the early 1990s,” Jackson said.

She said while the Reserve Bank’s rate hiking cycle was likely close to the end and households had built significant buffers during the pandemic, more rate rises could be on the cards to tame inflation.

Grattan Institute economic policy program director Brendan Coates said while Baby Boomers’ mortgage repayments were higher in the 1990s, their interest rates halved within two years of buying a home, an unlikely prospect for many young Australians now.

“It’s pretty clear that someone who takes out a mortgage today is going to pay more for their housing over the life of the loan than those who took out a mortgage in 1990, or at least very likely,” Coates said. “Younger Australians will spend much more of their incomes on the life of their loan than what previous generations did.”

He said beyond intergenerational unfairness, younger Australians paying down ballooning debts for longer will come at the cost of innovation and risk taking at an individual level for households, but also for broader the economy.

“Australians are becoming less entrepreneurial because a generation of people has got much larger mortgages they’ll be paying for much longer. It’ll mean they prefer safety and security in their incomes because they need to keep paying the mortgage.”

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