Victorian housing affordability headed for worst ever, PropTrack data from past 40 years shows

Paying a mortgage was at its most difficult in 1989/90 when interest rates hit astronomical highs — but Victoria is now heading into the same grim territory paired with record prices.

Who had it toughest? Housing affordability’s cursed path has been mapped in 40 years of data.

Housing affordability will be the worst it’s ever been in Victoria by mid next year if prices don’t fall to offset dramatically rising interest rates.

It now takes 138.6 per cent of the average household income for a 20 per cent deposit on a median priced home, up 35 per cent since June 2020, exclusive PropTrack data shows.

Paying a mortgage was the most difficult it’s ever been in 1989 and 1990 when interest rates hit historic highs — but homeowners are headed for the same burden within 12 months.

If interest rates rise another 3 per cent, as they’re expected to by the middle of next year, mortgage repayments for a typical recent buyer would rise to more than a third of average household income — equivalent to that peak.

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Deposit burdens have only grown over the past 40 years as prices have increased faster than incomes, making the current climate as difficult as it’s ever been to buy a house.

Cost of living is also soaring as real wages stall amid surging inflation, with petrol at $2 a litre, gas and electricity rising and even a humble iceberg lettuce hovering around $10.

And Victorian rents have hit record levels in a whack to hopeful buyers’ savings accounts, which are earning much less interest than they did when rates were at their peak.

This three-bedroom house at 54 Davis St, in the Geelong suburb of Belmont, is priced at $630,000-$670,000.

The four-bedroom house at 42 Aspect Drive, in outer northern suburb Doreen, is for sale for $589,000-$647,900.

Leading independent economist Saul Eslake noted interest rates were still “very low by historic standards”, but based on his metrics if they were to rise 3 per cent from their average level in the March quarter, “then in aggregate, Australians would be diverting the same percentage of their income to mortgage payments as they were in 1989”.

He suspected housing affordability would “get worse” over the next year “because the impact of higher rates will probably outweigh the impact of lower prices”.

Combined with how difficult it was to raise a deposit, Australia was heading into its worst time for housing affordability “certainly within our living memory”, Mr Eslake concluded.

The average rate on a new mortgage peaked at a little over 15 per cent in 1990, according to PropTrack, and some had a 17 at the front.

But it took just 52.5 per cent of the average household income for a 20 per cent deposit on a median priced home in Victoria.

PropTrack economist Angus Moore noted 2008 as the other most difficult time, between then and now, for paying a mortgage, with the cash rate increased above 7 per cent to tackle inflation amid the mining investment boom in the lead up to the Global Financial Crisis.

The increasing deposit burden was “particularly true over the past couple of years”, with Australian prices growing at their third fastest rate in 140 years in 2021.

“(And) serviceability is going to get harder over the next year as interest rates rise,” he said.

But he expected some respite as wage growth began to catch up with inflation, and as prices declined over the coming months and potentially into next year.

The three-bedroom house at 5 Hill St, Ballarat Central, costs $700,000-$750,000.

A four-bedroom house at 68 Isabella Way, Tarneit, is up for grabs at $580,000-$630,000.

PropTrack economic research executive manager Cameron Kusher told the Herald Sun last month the research group, operated by realestate.com.au, was expecting a 10 per cent decline for Melbourne’s market by the end of 2023 — including a 3 per cent fall this year.

Property Home Base buyer’s advocate Julie DeBondt-Barker believed getting into the market was easier than it was about a year ago when Melbourne surged out of lockdown.

“Prices have settled down and a lot of areas are flattening or lowering,” she said.

“The mistake a lot of first-home buyers could be making is they are now going to wait for that magic moment as to when to buy.

“The only way you know when it’s hit the bottom is when it starts going up again, and we don’t know.”

A two-bedder here at 96 Royal Parade, Reservoir, is priced at $850,000-$895,000.

Ms DeBondt-Barker noted expectations the market could “drop 30 per cent” amid the pandemic, “but it probably went up 20 per cent”.

“So my advice would be if you’ve got your deposit, and you’re ready to buy, now is a good time because the prices have come off a bit,” she said.

Lendi Group chief executive David Hyman said borrowers should make sure they were on the best rate with their existing provider, before considering a switch.

“In a rising rate environment, there’s never been a better time for homeowners to investigate refinancing options, with significant savings made by challenging their loyalty with their existing lender,” he said.

In Geelong suburb Grovedale, the three-bedroom house at 41 Birkenhead Drive is for sale for $665,000-$695,000.

This three-bedroom house at 12 Grattan St, Bendigo, is for sale for $540,000-$580,000.

Finder analysis showed cost of living pressures were slightly more severe in 1990 than in 2022, but both generations faced rising prices across similar items.

Finder head of consumer research Graham Cooke said budgeting could consider spend on essentials like bills and groceries, and “fun” things like eating out and travelling.

Assessing subscriptions, energy providers, keeping money in high-interest savings accounts — and even shopping at night to pick up discount deals — were other tips.

Jasmine and Ethan Crooks-Mosely, both 30, with their dog Echo, were able to buy their first home using government schemes to save more than $40,000. Picture: Nicki Connolly

PLAYING YOUR CARDS

Jasmine and Ethan Crooks-Mosely thought they’d be “like 80” before they paid off a home if they didn’t stop renting and get into the market.

After realising the extent of government first-home buyer schemes they could capitalise on, the couple, both 30, were able to secure a Coburg apartment last year.

“We always thought we had to get a 20 per cent deposit and were saving up for that, but everything’s so expensive, 20 per cent of even $650,000-$700,000 is like $130,000-plus, so that’s how much we thought we had to have,” Ms Crooks-Mosely said.

“But we did research and found out about only having to put a 5 per cent deposit down and having lender’s mortgage insurance waived, which with a couple of other grants as well helped it become more realistic for us.”

Jasmine and Ethan used the First Home Loan Deposit Scheme to guarantee their smaller loan size, and the state government’s First Home Owner Grant and stamp duty reductions.

Ms Crooks-Mosely advised first-timers to find out all the different grants available to them, and consider speaking to a mortgage broker to get professional advise for free.

“Altogether we saved $42,327 from utilising all three grants,” she said.

AT A GLANCE

1990

Interest rates peaked at a touch over 15 per cent, but it only took 52.5 per cent of the average household income of $38,400 for a 20 per cent deposit on the median priced home: $101,000.

In 1989, 35.1 per cent of the average income went to servicing a mortgage, and 32 per cent in 1990. In ‘89 it also took 58.2 per cent per cent of the income above for the deposit.

Now

Interest rates are at about 2.9 per cent, but it takes 138.6 per cent of the average household income of $111,000 for a 20p er cent deposit on a median priced home: $700,000.

Now, 27.7 per cent of the average household income goes to servicing a loan — if interest rates go up 3 per cent, this will match the difficulty faced in 1989/90.

Source: PropTrack, for Victoria

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