In the last two years, property buying has been booming. The pandemic pushed property prices up rapidly which, when coupled with record-low interest rates, saw borrowers rush to get onto the property market. But as rates start to increase for the first time in 11 years and the cost of living rises, the affordability of Australian housing is starting to bite. We take a look at the affordability problem, and how brokers are primed to help borrowers navigate it
11.4 years; that’s how long it now takes to save for a deposit. The shocking new stat came in the latest ANZ CoreLogic Housing Affordability Report – released earlier this year – which found that the median time required to save a 20 per cent deposit has risen by 2.2 years since the COVID-19 pandemic took hold in Australia.
The time taken – 11.4 years – is a new record high and the fastest uplift in the metric over a two-year period on record.
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The report, spearheaded by CoreLogic head of Australian research Eliza Owen and ANZ’s senior economist Felicity Emmett, noted that the rapid uplift in time to save a deposit highlighted the speed at which home values have risen through the current upswing, in which annual growth rates have been at their highest since the 1980s.
“While the upswing in rents and property values has generated increases in wealth and investment returns for many property owners, it has created greater affordability challenges for those who are renting, and those looking to purchase their first home…,” the researchers wrote.
“Unsurprisingly, the region with the longest time required to save a deposit is Sydney, where the estimated time to save is now at a record high of 14.1 years.
“The greatest increase in the time needed to save a 20 per cent deposit in the past two years across the capital cities was in Hobart, where the time required to save a deposit increased from seven years at March 2020, to 9.7 years by March 2022.”
As well as requiring more time to save for a deposit, more income is now needed to service a mortgage, too.
More than two-fifths of a borrower’s income (41.4 per cent of their gross annual household income) is needed to meet new mortgage repayments, the report found – well above the decade average of 36.52 per cent and marked the third consecutive increase at the national level.
The proportion required to service a new mortgage in the combined capital cities was 40.9 per cent while it was 38.3 per cent in the regions, where property prices are lower than in the capitals (but have been increasing rapidly).
Bluestone’s Home Loan Affordability Index has also found that Australians’ ability to afford a home loan is deteriorating – with its index tracking at its highest point since 2011, when housing markets had been hit by interest rate increases from mortgage providers.
The current annual affordability decline of 16.9 per cent marks the highest recorded in the series, which Bluestone consultant economist Andrew Wilson said came as buyers borrowed more to keep pace with markets as prices surged over 2021 and into 2022.
“Higher loan amounts, coupled with subdued wages growth, has resulted in a higher proportion of buyer incomes required for loan repayments,” Dr Wilson said.
“Strict lending conditions from financial institutions however place a ceiling on borrowing capacity that can sideline buyers and result in reduced demand and lower prices growth.”
Given that variable mortgage rates have now started increasing off the back of the official cash rate lifting, there could be additional challenges around housing affordability – particularly if housing values continue to fall nationally.
For example, the ANZ-CoreLogic report estimates that, if the price of the median Australian dwelling ($738,975) dropped by 10 per cent and variable rates rose to 4.72 per cent, monthly repayments would be $439 more a month.
It’s perhaps no surprise that mortgage demand has therefore started to drop in recent months. Equifax’s Quarterly Consumer Credit Demand Index found that mortgage demand in Australia had dropped by 4.6 per cent between the March 2021 and March 2022 quarters; the first instance that mortgage demand in the country has fallen in two and a half years.
This decrease was felt nationally, but was most apparent in Tasmania, which plummeted well above the national average at 11.5 per cent.
As such, a huge amount of focus has been placed on coming up with support measures to help borrowers get onto the market faster and more affordably (see pages 6-7 for more on some of the steps the states are taking to address affordability).
But it’s not just new home buyers who require more support at the moment, it’s existing borrowers, too.
What brokers can do
Brokers have always been specialists in helping borrowers get “mortgage ready” and understand their financial position, but in a rising interest rate environment, brokers are becoming increasingly busy educating borrowers on budgeting and helping them understand what will happen to their bottom line when repayments start increasing (see The Word for more).
Peter White AM, managing director of the Finance Brokers Association of Australia (FBAA), added that after 11 years, many borrowers may not have experienced increasing rates, and therefore we are entering “a whole new world for many borrowers”.
“The problem is not just current rises, but what is to come. Some borrowers will find themselves on the edge of affordability and others will be unable to afford the increases,” he added.
“We must remember that borrowers are not assessed on the actual rate, but the servicing rate which is around 2 per cent higher on average.
“When this margin is added to the higher and projected interest rate, it will mean that some borrowers will be unable to refinance.”
Mr White suggested that both finance and mortgage brokers should therefore be “at the forefront of early intervention and education”, helping clients understand the reality and discussing options and serviceability.
“The most important consideration for brokers is the best interests of the client. At the planning phase it is important to be realistic and discuss where the rate is likely to end up, not where it is now,” he tells The Adviser.
“We must accept that there are some cases we cannot help with. If it is clear that it is not in the best interests of a borrower to proceed, our obligation is to be transparent with the client.”
Indeed, politicians from across the political spectrum have been highlighting the importance of brokers now, too.
The financial services minister and assistant treasurer, Stephen Jones MP, told The Adviser in February (when he was still acting in a shadow capacity) that he wants “brokers to be 100 per cent focused on ensuring that everyone on their books has access to the best-priced mortgage at a time when we know mortgage rates are going to go up and cost living pressures are huge”.
One Nation leader Pauline Hanson last month took to Facebook to post a call to action to borrowers, too, stating: “Following two considerable cash rate increases by the Reserve Bank of Australia (RBA), it is inevitable that homeowners on variable rates will pay more to keep their home.
“The back-to-back rate rises are designed to slow down discretionary spending in our economy. In other words, make people rethink or curb their non essential spending like coffees and clothes.
“Anyone on a variable home loan should think about speaking with a mortgage broker who will compare your current loan arrangements with every lending Institute in the market.
“If you can save yourself money in these uncertain times. You owe it to yourself to do so. If you expect loyalty, buy a dog, don’t rely on a bank!”
With brokers now held to a best interests duty – ensuring that borrowers can not only afford new mortgages, but also continue to service their existing ones – will surely lead to another uptick in refinancing. But, with a recent Mortgage Choice survey showing that borrowers are “cautious about refinancing” in case they end up worse off, it’s a prime opportunity for brokers to be stepping up to the plate.
Mortgage Choice national sales director David Zammit commented that with interest rates expected to rise several more times this year – and 80 per cent of fixed-rate loans due to expire in the next two years, the time is right for brokers to step in to provide credit advice.
“Refinancing can feel daunting,” Mr Zammit said.
“However, it’s important people know that with the right advice from an experienced mortgage broker. The worst thing that can happen is that you find out you’re already on the best rate for your situation, and you stick with that,” he said.
[Related: Brokers prepare clients for rate rises]
