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Is this the right time to buy a house in Australia?

Vidhu Bajaj avatar
Vidhu Bajaj
- 9 min read
Is this the right time to buy a house in Australia?

Whether you’re someone who is waiting for the right time to buy a house or just curious about what is going on in the property market, it's understandable if you find yourself a bit confused and uncertain about what lies ahead. 

The Reserve Bank of Australia (RBA) has hiked the cash rate multiple times from its historic low of 0.10% in April 2022. The most recent 25 basis points increase has elevated the official cash rate to 4.35%. As a ripple effect, the big four banks have adjusted their variable interest rates in response to this cash rate rise. When mortgage rates increase, your borrowing power decreases, and getting a foot on the property market is more challenging than ever. 

As property becomes less affordable, one might naturally anticipate a price drop, offering some relief for buyers. However, the Australian property market has shown some unexpected trends. Despite the increased cost of borrowing, factors like rising migration levels, a drop in building approvals, and an all-time low residential vacancy rate have intensified the demand for housing, causing property prices to rise. 

What is the typical cost of a home in 2023?

The November 2023 CoreLogic Hedonic Home Value Index (HVI) signals a continued upward trajectory in home prices. The national HVI witnessed a 0.9% rise in October, accelerating from a 0.7% increase in September. 

According to the report, the median house price in Australia's combined capital cities is now $923,641, and the median unit price in Australia's capital cities is $647,148. The median dwelling value in Australia's combined regional areas is $595,940. 

The upswing in property prices, highlighted by the HVI, can significantly impact first home buyers, especially in the face of increasing mortgage rates. Rising property prices pose a challenge to affordability, potentially reducing the purchasing power of prospective home buyers. This, in turn, makes it more challenging for individuals to enter the housing market. 

Wage growth vs property prices: Can you afford to buy property?

Recent data from the Australian Bureau of Statistics reveals that in the September quarter of 2023, the seasonally adjusted Wage Price Index (WPI) witnessed a 1.3% rise for the quarter and a 4.0% increase over the year. In contrast, the average dwelling prices (according to the CoreLogic report referenced earlier) experienced a national increase of 5.6% in the 12-month period leading up to October 31, 2023. 

Evidently, wage growth is trailing behind the upward trajectory of property prices. When coupled with the rising mortgage rates, the prospect of purchasing a property may now pose more challenges compared to just a year ago. 

Yet, despite the continuous rise in property prices and the increase in mortgage interest rates, the demand for housing remains robust. If you’re thinking of buying a house, assessing your financial situation rather than trying to time the market may help. The key is understanding how much you can comfortably spend on a house without reeling under mortgage stress and determining whether this amount is enough for you to afford a house. 

Can John and Lara afford a mortgage on a house – A case study

The latest data from the ABS for May 2023 indicates that the average weekly earnings for a full-time Australian worker stand at $1,838. Assuming a modest 1.3% increase for the last quarter, this figure would see a slight uptick to approximately $1,863. 

With the average weekly earnings at $1,863, the annual salary reaches around $96,876, calculated by multiplying the average weekly earnings by the number of weeks in a year (52 weeks). If both Lara and John are working and earning average wages, their combined annual income would total $193,752. 

Considering the average house price of $923,641 (combined capital cities average) and assuming John and Lara have saved at least a 20% deposit, with some assistance from the First Home Owner Grant (FHOG) in their state, the remaining amount is financed through a mortgage. In this scenario, let's assume they borrow $750,000 for the house, securing a mortgage at a 6.5% variable interest rate per annum.

Using a mortgage repayment calculator, their monthly repayment amounts to $5,064. With an approximate monthly income of $15,000, about 34% of the couple’s pre-tax income is allocated to servicing the mortgage, indicating a potential risk of mortgage stress. 

What is mortgage stress?

Mortgage stress is commonly defined as when a household allocates 30% or more of its pre-tax income to mortgage repayments. Being in mortgage stress heightens the likelihood of struggling with repayments and defaulting on the loan, especially in a rising rate environment.

For those planning to buy a house, it could help to keep your mortgage repayments below 30% of your pre-tax income to avoid the financial and psychological effects of mortgage stress. 

So, is this the right time for you to buy a house in Australia?

To simplify, the ideal time to buy a house is ‘when you can.’ 

According to Diana Mousina, AMP senior economist, “There will always be turnover in the housing market because people need somewhere to live. It’s a fundamental need. If you need somewhere to live, you can meet the repayments and have the borrowing capacity to do it, then you might still buy.”

The rising house prices and the uptick in mortgage rates have made it increasingly difficult for people to enter the property market. However, the decision on whether it's the right time to buy a house hinges on your income, expenditure, and repayment capacity.

If you're an average income earner without substantial savings, obtaining a mortgage might lead to financial stress. On the other hand, if your income allows you to comfortably service a mortgage, purchasing a home might still be a viable option.

Ultimately, the decision to buy property is less about timing the market and more about evaluating your finances. While property prices, like other asset classes, can be unpredictable, historical trends show a long-term upward trajectory. If you have the financial means and sufficient flexibility in your budget to absorb potential rate hikes, now might be a suitable time to consider buying a home. However, it's essential to explore your mortgage options thoroughly. Some lenders may still offer competitive rates to new home buyers.

Comparing your options allows you to find a loan with the features you need and an affordable interest rate rather than sticking with your childhood bank out of familiarity. Assess whether a fixed or variable rate suits your risk appetite and budgeting style. You could then utilise comparison tables and calculators to find a home loan that aligns with your financial situation and goals.

Four signs you may be ready to buy a house

If you're paying a lot in rent but have room in your budget to afford a mortgage, it could be a good time to consider buying a home. Instead of trying to predict the market, assessing your financial situation is key to determining your readiness for homeownership. Here are four signs that you might be prepared to buy a house:

1. You have enough savings for a home loan deposit

Ensuring you have sufficient savings for a home loan deposit is a crucial step in your property journey. Typically, lenders expect a minimum of 20% of the property price to be paid upfront to qualify for a home loan. This requirement not only mitigates their lending risk but also enhances your equity, allowing you to borrow a more manageable amount. 

In general, the larger your deposit the lesser you may need to borrow. A larger deposit can also help you qualify for more competitive interest rates on your loan. However, saving a substantial deposit can be challenging, especially in some Australian capital cities where property prices are notably high. Some lenders may allow you to borrow with a 10% deposit, you may need to pay for Lenders Mortgage Insurance, adding to your overall costs. 

Beyond the deposit, it's essential to factor in additional expenses. These may include stamp duty, loan application fees, costs associated with building and pest inspections, conveyancing fees, and more. Being prepared for these supplementary costs can help make your home-buying journey seamless.

2. You know how much you can afford to spend

Before you start thinking about buying a home, it's crucial to figure out how much of your income you can actually use for your mortgage. A good rule of thumb is to make sure your monthly mortgage payments don't go over 30% of your total monthly income. 

To get a clear idea of your financial situation, you can use an online calculator for your income and spending, such as the budget planner offered by MoneySmart. This could help you see where your money is going each month, so you can decide how much you can comfortably spend on your loan each month. 

Once you have a number in mind, a mortgage repayment calculator can be handy. It helps you figure out the monthly payments for different loan sizes, terms, and interest rates, making it easier to know how much you can borrow for a house. But consider using a slightly higher interest rate, maybe half a percentage point more than the ongoing variable interest rate, when making these calculations. This way, you could prepare yourself for future rate hikes.

3. You have a stable job history

A stable job, one that pays well enough to cover the costs of homeownership and daily living expenses, could indicate financial readiness to buy a house. The stability in income is crucial to guarantee your ability to handle mortgage payments and associated costs, while maintaining a comfortable lifestyle. 

For lenders, a stable job history signifies a consistent income source, reducing the risk associated with lending. It provides them with the assurance that you can meet your financial commitments and keep up with your mortgage.

4. Your credit score is good

Your credit score is a numerical representation of your creditworthiness as a borrower. Lenders use this number to analyse how effectively you handle your finances and how likely you are to meet your monthly repayment obligations. 

Maintaining a positive credit history with a good to excellent credit score can significantly enhance your likelihood of loan approval. It also makes you eligible for better home loan terms and interest rate discounts. 

If you’re searching for a home loan, remember to compare your options to find a deal that best suits your circumstances. If you need help finding a suitable home loan, speaking to a mortgage broker may help. 

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Product database updated 21 Jul, 2024

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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