Alexandra Kerr said she and her husband Shaun Taylor made eight unsuccessful offers over 18 months in Brisbane’s rising market before finally buying their first home in April.
They’re borrowing 95 percent of the A$559,000 ($524,733) cost with a 5.05 percent adjustable-rate loan, she said. The high price the couple paid means they’ll have to postpone remodeling the kitchen in the 1940s three-bedroom detached home, which was marketed as a “renovator’s delight.”
“It was such a long road and got crazy for a bit, but we now have a house that we both love,” Kerr, 26, said.
Mortgage rates at their lowest in four-and-a-half years are helping drive household debt to record levels in Australia. The average home-loan size jumped to an all-time high of A$322,900 in January, according to Australian Bureau of Statistics data. As cheap money and a shortage of housing in Australia’s biggest cities spurs home values to new heights, first-time buyers face a choice of taking on more debt or dropping out of the market.
“Higher levels of affordability have been purely based on the fact that interest rates are so low,” said Cameron Kusher, senior research analyst at property information provider RP Data in Brisbane. “And first-home buyers purchasing now need to be accounting for the fact that they’re going to start rising.”
The average variable home loan rate was 5.95 percent as of March 31, the lowest since September 2009. The Reserve Bank of Australia’s record-low 2.5 percent benchmark interest rate has driven down the cost of mortgages.
Almost 85 percent of owner-occupants buy with adjustable-rate loans, according to statistics bureau data, which are vulnerable to increases in interest rates. Even when buyers opt to fix their mortgage rate for a fee, the loans revert back to variable rates after a specified number of years.
Interest rates are poised to rise after unemployment dropped to 5.8 percent in March from a decade-high 6.1 percent in February. That, combined with soaring home prices, will compel the central bank to start raising rates from the first quarter of 2015, according to the majority of economists in a Bloomberg survey.
Home prices across Australian cities reached a record in September and continued climbing to an average of about A$636,000 in March, a 10.6 percent jump from a year earlier, according to the RP Data-Rismark Home Value index. In Brisbane, where Kerr and Taylor bought their home, prices have risen 4.8 percent in the past year, according to the index.
That’s making it harder for many first-time buyers to fulfill their dreams of owning a suburban home, with a grassy backyard, swimming pool and barbecue. Their share of mortgage approvals slipped to a record-low 12.3 percent in November, according to government figures. It has since hovered near 13 percent, compared with a peak of 31.4 percent in May 2009.
The Housing Industry Association-Commonwealth Bank of Australia housing affordability index worsened to 74.7 in the last three months of 2013 from 75.1 the previous quarter. Houses in Australian capital cities will this year be the least affordable after the U.K. among nine markets, Fitch Ratings said in a January report.
“Fitch expects the affordability metric to slightly deteriorate over the next few years as home prices are likely to grow more than income,” according to the report, which based the measure on the ratio of average values to income.
Home prices are almost seven times the average disposable income of new buyers in New South Wales state, where almost two-thirds of the population lives in the capital Sydney, according to Sydney-based data firm Digital Finance Analytics. In Victoria state, whose capital is the nation’s second-biggest city Melbourne, prices are slightly more than six times income. In Queensland, they’re just below that multiple, the data shows.
Australia’s housing debt equaled a record 134.6 percent of disposable income at the end of 2013, up from 130.9 percent a year earlier, according to the central bank. The ratio was 119.9 percent in the U.K., 104.5 percent in Canada, and 78.5 percent in the U.S. at the end of 2012, the most recent data from the Organization for Economic Cooperation and Development showed.
“Spiraling house prices will probably lead to trouble later, either because they in turn fall, or households will extend themselves too far,” Martin North, principal at Digital Finance Analytics, wrote on the firm’s website this month.
In December, the Australian Senate started an inquiry into the causes of declining affordability and ways to make home ownership easier. A Senate report is expected in June.
A shift in state grants for first-time buyers to those purchasing only new properties partly explains their decline in the market, according to Matthew Hassan, senior economist in Sydney at Westpac Banking Corp. The change removed financial assistance of as much as A$7,000 for first-time buyers of existing homes over the past two years in New South Wales, Queensland, Victoria and the Australian Capital Territory. The move pushed new buyers, who might otherwise have waited to purchase, into the market before the grants ended, he said.
The grants’ focus on new homes was aimed at stimulating construction to alleviate a shortage in some areas that contributed to surging prices. The RBA, in its submission to the Senate’s inquiry, cited the concentration of Australia’s population in two cities as a major reason for the supply constraints. About 40 percent of the population of the country the size of continental U.S. lives in Sydney and Melbourne.
“Unlike many other comparable countries, Australia lacks the medium-sized cities that could provide alternatives to households seeking to avoid high housing costs in the largest cities,” the central bank said in the statement in February.
The shortage may be easing with building approvals and mortgages for construction on the rise. Building approvals for houses and apartments rose a seasonally adjusted 23.2 percent in February from a year earlier, statistics bureau data show. Loans for new construction for investors surged 135 percent from a year earlier, and those for owner-occupants jumped 25 percent in the year ended on Feb. 28, according to the figures.
The increase, particularly in construction of apartments and higher-density homes, will improve affordability, the RBA said in its submission. This “allows households to choose to economize on the amount of land they consume, rather than being restricted to larger and more expensive blocks,” it said.
Bank of America Merrill Lynch’s Saul Eslake, in his submission to the Senate inquiry, blamed Australia’s tax rules, which favor investors over owner-occupants, for the drop in affordability. “Negative gearing” allows landlords to claim losses on their investment properties and offset them against other income.
It’s “quite difficult to think of anything that would do more to improve affordability conditions for would-be homebuyers than the abolition of negative gearing,” said Eslake, the bank’s Melbourne-based chief Australia economist. He is urging a cap on the proportion of expenses that can be offset, or removal of the policy for future buyers.
Young Australians who are still buying homes tend to earn incomes of more than A$50,000, according to Sydney-based research firm Retail Finance Intelligence. In February, Jennifer Eagle and her partner Chris Grant, both 24, bought their first property for A$299,000. They plan to rent out the three-bedroom townhouse about 20 kilometers (12 miles) southwest of Brisbane’s center.
Eagle, a Melbourne-based public relations coordinator at property investment advisory Positive Real Estate Pty, and Grant earn a combined yearly income of A$80,000. They bought the townhouse with a 5 percent down payment after failing to find a property they could afford near central Melbourne. The interest-only payments are slightly higher than the A$1,470 a month they make in rent.
The couple is gambling that their incomes will increase enough to make the higher payments once mortgage rates climb.
“We wanted to build up a property portfolio that’s going to rise much faster than our salaries, and buy our own house with that,” Eagle said. “By the time interest rates get higher, I’m hoping that both my partner and I are on higher salaries and that our property will have gained enough.”
Kerr, who expects to get a job after graduating from university with a communications degree, and Taylor, who works in marketing at a bank, are also concerned about paying the mortgage on their Brisbane home if rates rise.
“Two incomes isn’t a forever thing if we stop to have kids,” Kerr said.