‘An ugly scene’: Bleak outlook for Melbourne’s home buyers revealed

First home hopefuls are finding it tougher to get into the property market, as skyrocketing mortgage repayments outweigh the benefit of falling house prices.

A Melbourne couple on an average wage would need to pay 42.1 per cent of their combined income to repay a loan on an entry-level house they bought for $660,000, modelling from Domain’s First Home Buyer Report, released on Tuesday, shows.

That’s well above the 28.2 per cent of income recorded in last year’s report and also above the 30 per cent threshold that places homeowners in mortgage stress, meaning not everyone might qualify for a loan that large.

Someone who bought an entry-level unit priced at $412,566 was marginally better off, spending 26.3 per cent of their incomes on mortgage repayments. But the percentage has increased from 18.9 per cent last year.

The modelling assumes a couple aged 25 to 34 years old who earn the average income for that age bracket and save 20 per cent of their post-tax income towards a home at the 25th price percentile.

Domain chief of research and economics Dr Nicola Powell said the affordability conversation has flipped this year, because mortgage repayments have become a bigger issue than saving for a deposit as house prices fall.

First home buyers in Melbourne on average wages are now paying 42.1 per cent of their income on mortgage repayments.Credit: Joe Amaro

When house prices boomed, saving for a deposit was the main challenge for first home buyers. But Melbourne’s house prices dropped by 5.6 per cent in 2022 to a median $1,032,903, according to Domain data.

“That pull back in house prices we have seen hasn’t been enough to outweigh the amount needed to service the debt,” Powell said.

While interest rate rises were hitting mortgage repayments, it had the opposite effect on the time it takes to save for a property as it bolstered prospective homeowners’ bank accounts, Powell said.

The time it would take an average couple to save for a house in Melbourne compared to a last April has fallen by 11 months, from 6 years and 6 months to 5 years and 7 months.

The time to save for an entry-level unit fell by 9 months over the same time.

The biggest falls in savings time were in the more expensive parts of the city. In the statistical region of Stonnington East, time to save was down 35 months since last year, while cheaper areas to buy property, like Melton-Bacchus Marsh, dropped by just 5 months.

Though buyers can save up quicker, new research from the Australian Housing and Urban Research Institute, released on Tuesday, showed 40 per cent of homeowner hopefuls studied, aged 25 to 34, expect to call on family for financial help.

Research author and University of Sydney senior lecturer in urbanism Dr Laurence Troy said that included gifts towards a deposit, or allowing property-owning hopefuls to live at home rent-free, for the participants in Sydney and Perth.

He said Sydney first-home buyers were facing the toughest conditions in the country, but other capital cities like Melbourne would soon follow.

“Sydney is now where the rest of the cities are headed – they’re not there now – but they will be in the coming years,” he said.

Though first home buyers can get help from government incentives, they were not significantly helping young first time buyers to get into the market, Troy said.

“The incentives and grants they make available don’t really help – it can bring some decisions forward, but it doesn’t make it easier to get into the market,” he said.

CBA head of Australian economics Gareth Aird said the number of first home buyers was retreating, as the Reserve Bank hiked interest rates.

“It’s quite an ugly scene for first home buyers,” Aird said. “Even though prices have fallen, the reduction in borrowing capacity has been greater.

“It’s actually become a lot worse for first home buyers because the rise in serviceability makes it harder to get into the market in the first place.

The idea of a first home is changing as house prices rise.Credit: Jason South

“The only thing that’s gotten better is that the deposit required is a little bit less because house prices are down, but they still have more money going out each month on rent when they’re trying to save for a deposit.”

Foster Ramsay Finance’s Chris Foster-Ramsay said first home buyers looking for a loan were relying more on their family for cash gifts, as offering to be a guarantor on a loan was sometimes not enough to get them approved.

He said what constituted a first home was changing, as buyers were priced out of houses in more expensive parts of the city.

“The closer you go to the city, the more likely you are to buy an apartment,” Foster Ramsay said.

“But even houses in the outer ring suburbs like those between the west and Geelong, they’ve changed as well, because house and land construction prices are going up.”