Australian Property Pulse - Newsletter #7

Welcome to this week's edition of Australian Property Pulse

In this edition, recent commentary from the Reserve Bank of Australia (RBA) reveals a concerning rise in highly leveraged borrowers struggling to meet their mortgage repayments, with around one in 20 facing a cash-flow shortfall. This signals growing financial stress in the housing market.

First-home buyers are finding it increasingly difficult to enter the property market, with analysis from Money.com.au showing that deposits have nearly doubled over the past 12 years. With property prices surging by 99%, the average 20% deposit has skyrocketed from $97,980 to $194,660.

Meanwhile, the Senate is reviewing the role of the Australian Prudential Regulation Authority (APRA) and its influence over mortgage lending. This inquiry could lead to significant changes, particularly for first-home buyers struggling with current lending conditions.

Affordability constraints are reshaping the property market, with stronger growth seen in the lower quartile of property prices. Over the last year, lower-priced properties have risen by 12.4% across most capital cities, outpacing higher-end markets, except in the ACT and Darwin.

Finally, recent data has reignited debates over tax concessions like negative gearing and capital gains discounts. The Australia Institute found that the wealthiest 10% of Australians receive over half of these benefits, raising concerns about the fairness of the current tax system.

Recent commentary from the Reserve Bank of Australia (RBA) highlights critical trends in the housing market and borrower behavior. The RBA has noted an increase in the number of highly leveraged borrowers struggling to meet their mortgage repayments. In fact, around one in 20 borrowers is currently experiencing a cash-flow shortfall, where their income fails to cover essential expenses and minimum mortgage obligations.

Low-income borrowers are disproportionately represented in this at-risk group. Since the first cash rate hike in May 2022, minimum mortgage repayments have soared by 30 to 60 per cent, further straining household budgets. While the RBA anticipates that more borrowers may fall behind on their repayments, it believes the overall number will be modest. Notably, over half of those considered at risk still possess cash reserves sufficient to cover more than six months of repayments.

Looking ahead, the RBA forecasts a decline in the share of borrowers experiencing cash-flow shortfalls, projecting a decrease from 5 per cent now to just 2 per cent by 2026 as household finances stabilize with lower interest rates and inflation.

Interestingly, despite rising mortgage arrears, the current high property values suggest that few households are in negative equity. This indicates that significant financial stress for borrowers or banks is unlikely in the near future.

First-home buyers are finding it increasingly difficult to break into the Australian property market, as affordability continues to decline. Analysis by Money.com.au reveals that buyers today need nearly double the deposit compared to 12 years ago. The average property price has surged by 99%, from $489,900 in 2012 to $973,300 in 2024. Consequently, a 10% deposit has risen from $48,990 to $97,330, while a 20% deposit has soared from $97,980 to $194,660.

While deposit requirements have nearly doubled, full-time wages have only increased by 42% over the same period. This growing affordability gap has forced many first-home buyers to seek alternative financing solutions. Separate data shows that up to 60% of buyers now rely on the "Bank of Mum & Dad," a significant increase from just 12% in 2010.

Investors and upgraders are further squeezing out first-home buyers, as evidenced by mortgage data from the Australian Bureau of Statistics (ABS), which shows lower average loan amounts for first-home buyers compared to investors. Affordability challenges are leaving many first-time buyers with few options but to depend on schemes like Labor’s expanded Home Guarantee Scheme, which supported one in three first-home buyers last financial year.

Without meaningful change in the market, whether through price corrections or additional support, it’s clear that homeownership remains out of reach for many Australians. Sustainable solutions are necessary if the average first-home buyer is to succeed without heavy reliance on family or taxpayer support.

The Senate is currently investigating whether the Australian Prudential Regulation Authority (APRA) holds too much power over mortgage lending, with some suggesting that its authority should be reined in or subject to greater parliamentary oversight. This review could have significant implications for the Australian housing market, especially for first homebuyers who are finding it increasingly difficult to enter the property ladder.

At the same time, Prime Minister Anthony Albanese recently confirmed that Treasury is evaluating options to reduce negative gearing and capital gains tax discounts for property investors. This move comes as the government aims to win back renters who have shifted their support to the Greens. The focus on housing affordability has intensified, as record property prices, rental shortages, and rising interest rates put pressure on Australian households.

Looking ahead to the federal election, which must be held by May 2025, the Coalition is rolling out policies targeting first homebuyers. One such policy would allow aspiring homeowners to access a portion of their superannuation to use as a deposit, aimed at improving affordability for those struggling to save for a down payment.

With housing affordability at the forefront of political debate, the next few years could see major changes to mortgage regulations and property investment incentives. Whether these reforms will open up opportunities for first homebuyers or further complicate the housing market remains to be seen. The balance between regulatory prudence and consumer access to mortgages will be critical in shaping Australia's property market moving forward.

Affordability constraints and reduced borrowing capacity are continuing to shape the Australian property market, with stronger conditions emerging in housing markets at the lower end of the price spectrum. Over the past twelve months, lower quartile dwelling values across the combined capitals have increased by 12.4%, significantly outpacing the 3.8% rise seen in the upper quartile. This trend is evident across all capital cities, except for the ACT and Darwin, which remain the most affordable markets when adjusted for local household incomes.

The current market dynamics highlight the growing divergence between different segments of the property market. Properties at lower price points are experiencing heightened demand, driven by affordability factors and constrained borrowing capacities. In contrast, higher-priced properties are seeing more subdued growth as buyers face increasing financial pressures.

Another interesting aspect of the current market is the performance of unit values. In six out of the eight capital cities, unit values have risen at a faster rate than house values. In Melbourne, where house values have seen a decline, unit values have fared better, recording a smaller drop. This shift towards unit preferences could reflect changing buyer priorities, as affordability concerns and lifestyle changes come into play.

Overall, the property market continues to evolve, with affordability constraints and borrowing limitations playing a key role in shaping buyer behavior. The lower end of the market remains buoyant, while more expensive properties are feeling the pressure. For buyers and investors, understanding these shifts and staying informed on market trends will be crucial in navigating the months ahead.

Recent data has reignited the debate on how tax concessions, such as negative gearing and capital gains discounts, disproportionately benefit certain segments of the population. According to analysis by The Australia Institute, the wealthiest 10 percent of Australians receive over half of the benefits from the capital gains tax discount and rental deductions. This raises questions about the distribution of tax advantages and whether the current system is favoring the wealthiest investors.

While this analysis suggests that affluent individuals are benefiting most, the Property Council offers a different perspective, arguing that lower-paid and essential workers are also significant beneficiaries. When examining the total number of negatively geared taxpayers by profession, it’s clear that many essential workers are investing in property. Australian Taxation Office (ATO) data from the 2021-22 period shows that 27,639 registered nurses, 14,946 secondary school teachers, and 13,556 infant or primary school teachers owned at least one negatively geared investment property.

The divide in views is further highlighted by the types of occupations most likely to benefit from negative gearing. High-income professions like surgeons, anaesthetists, and internal medicine specialists—who also rank among the top earners—are prominent investors in negatively geared properties. Additionally, over 15 percent of school principals, IT managers, and mining engineers also report owning at least one negatively geared investment property.

As the Albanese government explores possible changes to these tax concessions, the debate around their economic and social impact will likely intensify. While some argue that the wealthiest Australians reap the most significant rewards, others point out the crucial role these concessions play in helping everyday Australians build their wealth. How this conversation unfolds will have far-reaching implications for property investors across all income brackets.

If you're interested in securing your first home, expanding your investment portfolio, or exploring property investment through your Self-Managed Super Fund, please don't hesitate to contact Steven at 0414 759 733.