Young & Invested: Can millennials afford to buy a house in Australia?
Is there any hope for younger people in our housing crisis?
Welcome to my column, Young & Invested where I discuss personal finance and investing for Gen Z and Millennials. This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.
Edition 4
Undoubtedly, the last decade has called the notion of the Australian dream into question. That is – the promise that a middle-class income could comfortably earn one a life in suburbia.
Last week I discussed whether millennials can afford children in the current economic climate. The answer was largely no. However, before children come along, the traditional course of life is home ownership. There is no doubt Aussies are obsessed with housing. Can you blame us? With favourable tax policy, the horrors of renting in a country with few rental protections, and the wealth we have seen earlier generations create through property ownership – it is unsurprising that young people are committing to eyewatering levels of debt to attain this dream.
A breakdown of the current state of Australia’s wealth shows 56% of household wealth is held in housing. The ‘disappearing’ middle class phenomenon refers to the growing gap between middle-income and rich Australians, with research from the Melbourne institute confirming that property ownership is a key factor in this disparity.
As contentious and exciting as the debate is, this article won’t be an exploration as to whether you need property to build wealth in Australia. We’ve all heard the story of an uncle buying a middle-of-nowhere property in 1980 for $50,000 and selling for $1 million. However, that is simply not the case for younger people now. Given the current income to price ratio for housing, the same level of returns that previous generations enjoyed is unlikely. Naturally, this assumes that there is a limit to how far the income to price ratio can climb. You may be better off buying a deposit’s worth of lottery tickets, then trying to find the next middle-of-nowhere property that would see the same appreciation.
Prices not coming down
KPMG’s latest 6-mothly report on Australian capital cities found that whilst house price growth will be down from 2024, there is still an expectation of a 3.3% rise nationally. Furthermore, one of the trends identified is that unit prices are expected to modestly outpace house prices over the next two years. This could be driven by the demand for units/apartments due to the lower entry price point.
In my previous article, can millennials afford children, I ran through a comparative measure of annual income to house prices between 1970 and 2020. What I found was largely unsurprising, despite interest rates being much higher in the 80s. The annual income to house price ratio of ~3.5x in 1970 is modest compared to today’s figure of 10.2x. I think this illustrates the disparity between young Australians entering the property market now vs a few decades ago.
House prices have grown well ahead of wage growth for decades. New South Wales for example, has seen a 99% growth in value from 2014 to 2024, whilst wage growth has risen 26% over the same period. Contrary to popular belief, this is not exclusively a high-density city issue, similar figures occurred in South Australia, Queensland and Tasmania.
So, can millennials afford to buy a house?
Anecdotally, we assume that purchasing a house is out of reach for a vast number of millennials. But what do the numbers look like? How much would an individual or couple need to earn to comfortably afford a house?
New South Wales, specifically Sydney, receives a lot of attention for housing affordability with a trend of aspiring homeowners leaving for other states. I exclude Sydney as an outlier in the below calculation. Instead, I use my home state of Western Australia as an example.
My analysis makes a rather large assumption that could be an argument in itself. That is – the 20% deposit has already been accounted for. As we know, this is typically half the battle when it comes to home ownership but for the sake of simplicity i’m making this assumption.
My assumption is an individual (with a 20% deposit) purchases a median home in WA for $800,000. Financial advice generally recommends that annual mortgage repayments shouldn’t exceed 30% of pre-tax income. Keeping this in mind, the monthly repayment on a 30-year loan term would be $4,020 at 6.44% per NAB’s home loan calculator. This translates to an annual repayment of $48,240 per year.
If this $48,240 is 30% of an individual’s pre-tax income, then their pre-tax income would equate to $160,800. That is the annual salary in Western Australia that is required to comfortably purchase a median home, assuming a 20% deposit has been put down.
Now, salaries in Western Australia skew high given the prevalence of the mining industry. In fact, ABS data shows that median weekly earnings in Perth are the highest nationally at $1,500. That equates to approximately $78,000 annually. It doesn’t take a mathematician to deduce that there is a large discrepancy between the median salary earnt and the salary that is required to comfortably purchase a median home. Specifically, this discrepancy is $82,800.
Now what does this look like for a millennial couple? Canstar broke down ABS data to show the median annual income by age category for fulltime workers.
If we take the median combined income for a male and female between the ages of 25 – 34, that gives us a median household pre-tax income of $161k. This is just enough to comfortably purchase a median house in Western Australia.
This exercise asserts that it is not feasible for an individual on a median income to purchase a house comfortably by themselves, however it is considerably easier as a couple. It is important to note that this analysis does not consider the difficulty of acquiring a deposit which is a large barrier for most.
Furthermore, this analysis has taken Western Australia as an example where the median house price is much less than Sydney’s eyewatering median house price of $1.5 million. The results would change significantly if we were looking at Sydney in isolation.
Do you need to own a home?
A recent study exploring the impact of homeownership on mental health outcomes found that homeowners had lower rates of depressive disorders and fewer cognitive difficulties. These findings were then used to reinforce the idea that owning a home provides stability and a sense of control, which may alleviate stress and enhance mental well-being, overall health and longevity.
It may be overly simplistic to conclude that there is some direct correlation. Getting the keys to a house isn’t society’s answer to the mental health crisis. There are numerous variables associated with the financial capacity to own a home that also positively impact mental health outcomes. Owning a home is a labour of love and opposing studies propose that rising amounts of mortgage debt is causing Australians huge psychological strain.
Then of course we consider the social aspects of owning a house. Besides being an asset and source of wealth for many, research shows that housing also serves as an indication of social and economic status that also directly impacts residents’ economic status and class mobility. In a recent video, do you qualify as rich, Mark and I sat down to discuss his article on the different measures of ‘rich’ in Australia and how property ownership contributed to that.
Mark has previously outlined reasons why he has chosen to rent for life and how that affects him as an investor. Mark highlights the need to determine your investment approach and priorities before making the decision to purchase a property. He cites the benefit of freedom and flexibility driving his decision, with the alternative being a temporary depression of cash flow to achieve home ownership. The real cash flow benefit from owning a home only comes once you’ve paid it off. Of course, that is associated with the opportunity cost during the lengthy period it takes to pay it off in full.
The purpose of this article wasn’t to persuade individuals either way. The reality is, no matter how many lectures you endure about getting on the property ladder from your grandpa at Christmas, most millennials simply cannot afford to right now.
Is this just an Aussie issue?
James Gruber’s article Australian housing is twice as expensive in the US, he explored how the median price to income ratio of Australia stacked up to other developed countries.
The chart shows that Australia’s median multiple is more than 2x the US market of 4.8x or almost 2x the UK market of 5x.
With the Federal election looming, it is unsurprising that the cost of living crunch and housing affordability are key battle lines. The Liberal party has taken an immigration-focused stance with a temporary ban on foreign investors and temporary residents purchasing existing homes, a permanent reduction in migration and international students, as well as a promise to cut the red tape. On the other hand, Labor have proposed a $10 billion Housing Australia Future Fund that would deliver 30,000 affordable homes within the first five years as well as a similar two-year ban on foreign property investors.
There are considerable political implications for both parties as they navigate this crisis. In my next article, I will explore the policy failures of our leadership and other avenues that may alleviate cost pressures on young Aussies.
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Previous Young & Invested column:
- Young & Invested: Why I don’t invest in individual shares.
- Young & Invested: Can millennials afford to have children?
- Young & Invested: Is University still worth it?
