Domain’s latest First-Home Buyer Report has unveiled a concerning trend of increasing mortgage stress in Australian cities compared to five years ago. This rise in mortgage stress can be attributed to the impact of high interest rates and soaring property prices. Mortgage stress occurs when repayments exceed 30% of household income.
The report highlights that 24-35-year-old couples with average wages are particularly affected by mortgage stress, struggling to make repayments on entry-level homes. Dr. Nicola Powell, Domain’s chief of research and economics, emphasizes the importance of mortgage serviceability rates in assessing housing affordability for first-time home buyers. While property prices are a significant factor, mortgage serviceability determines a buyer’s ability to meet loan repayments.
Despite a recent drop in mortgage rates following the Reserve Bank of Australia’s February rate cut, rates remain high compared to previous years, especially considering the rising debt levels. Aggressive rate hikes in 2022 and 2023 have significantly impacted mortgage serviceability, while property prices have reached new highs, pushing household debt levels up.
Mortgage stress is most prevalent among entry-priced houses in capital cities, where they account for 47.1% of household income, while units require 30.7%. The proportion of income needed for an entry-priced house across the combined capitals is now 19 percentage points higher than five years ago, with units rising by approximately 8 percentage points. All capital cities, except Darwin, are currently affected by mortgage stress.
Sydney and Canberra stand out as the most affected cities, with repayments for entry-priced houses accounting for 57.6% and 46.7% of income, respectively. Darwin is currently the only city without mortgage stress for entry-priced houses, but repayments still comprise 27.7% of household income. Perth is the next best city, requiring 37.3%, which exceeds the 30% threshold for mortgage stress.
Dr. Powell explains that the increase in mortgage stress across capital cities reflects the compounding effects of rising interest rates and property prices, leading to larger mortgage repayments. To ensure sustainable home ownership and avoid future financial strain, it is crucial for first home buyers to understand mortgage serviceability.
Regarding entry-priced units, the report offers more encouraging findings. Repayments for entry-priced units in Darwin, Perth, Canberra, and Melbourne require less than 30% of the average income. Darwin offers the most affordable units, with repayments requiring only 17% of income, followed by Perth at 27.3%, Canberra at 26.5%, Melbourne at 27.5%, and Hobart at 29.1%. Brisbane and Sydney have the least affordable units, with repayments taking up 34.4% and 35.8% of income, respectively, followed by Adelaide at 30.8%.
Dr. Powell suggests that mortgage stress levels could gradually ease over time due to the current property market slowdown, easing prices, and cash rate cuts. However, lower cash rates may also boost borrowing power, potentially driving prices up, especially with more rate cuts expected in the future. She emphasizes the need to address issues such as housing undersupply and ensure adequate, affordable, and sustainable housing for the future.
