Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 179

Home ownership struggles will drive changes

Last month, I explained that without making any extra contributions, a 30-year-old couple would run out of super at age 75 if they needed a combined income of $59,160 a year after retiring at age 64.

But this isn’t the only problem facing many couples today. The cost of housing means that not only will they struggle to make extra super contributions, they will have real problems buying a home. Based on my experience with clients, it’s a major issue for almost every Australian under 30.

Who can afford a Sydney house?

A measurement of official house price data and mortgage costs by comparison website RateCity looked at the salary required for a single person to afford repayments on a 30-year loan. The main criterion was that the individual could not spend more than a third of their income on housing costs. Here are the results for Sydney:

  • Median House Price: $825,000
  • Loan Size: $660,000
  • Interest Rate: 4.74%
  • Monthly Repayment: $3,439
  • Annual Income Needed: $137,556

Are these figures an accurate reflection on what is happening? I would suggest not. First, few single first home buyers earn $137,556. Secondly, the median house price in Sydney is now a lot more than $825,000.

Source: Macquarie Equities, APS and UBS

Thirdly, people are clearly spending more than one third of their income on loan repayments. As you can see from the chart below, property prices are more than seven times average income levels.

Source: Morgan Stanley and Macquarie Equities

What caused the surge from 1996 to 2003? Consumer confidence, immigration and housing shortages are possible reasons, but I suspect rising wages and dual household income earners were the key factors.

Whilst not many 30-year-olds earn $137,556, it’s quite possible that a 30-year-old couple can be jointly earning $120,000. Given the lower tax rates that two incomes generate over the single person, a 30-year-old couple could generate sufficient income at today’s interest rates to make the necessary mortgage payments listed above. However, home ownership in Australia has fallen from 71% to 67% in the last 20 years, and more significantly, for Australians aged between 25 and 34, the proportion has fallen from 39% to 29%, and for ages 35 to 44, from 63% to 52%. First home buyers now make up only 13% of new home loans.

Other buyers and finance sources

Obviously, there are far more people buying properties than only 30-year-old couples. Overseas buyers and investors appear responsible for much of the post-2010 surge, and favourable tax concessions are pushing homes out of reach for a high percentage of younger Australians.

Anecdotal evidence from clients suggests that the desire to get a foothold in the property market is causing many people to adopt strategies that are increasingly risky.

Living with parents is a popular solution to the housing problem, but that becomes strained after a while. Many parents now use equity in their home to finance a mortgage for their children. A major bank recently confirmed that 10% of its property loans were guaranteed by people other than the purchasers.

This is fine if the debt is not too large and the children can pay it off quickly. But the risks with this strategy are high. If the debt repayment becomes difficult due to unemployment, interest rate rises, a property downturn, divorce or an unexpected pregnancy, both the parents and the children could suddenly have a major cash flow problem. It wouldn’t take much for both to lose their homes.

Buying an investment property whilst living with your parents or renting is another popular strategy. This has some positives if the rent covers the loan interest and expenses while benefitting from a rising property market. Negative gearing allows an offset of the excess loan interest and costs (above rent received) against other income tax.

However, many investors underestimate the costs involved, especially if they never live in the property later. Land tax, capital gains tax, stamp duties, council rates, strata levies, repairs and maintenance, etc could render the whole venture uneconomic. Many people look to maximise deductions by taking out an interest-only loan, but this can backfire if the property is worth less than the loan when it comes to sell.

Policy inequity will lead to change

The idea of renting somewhere before buying and hoping for a significant decline in the housing market is not popular with my clients. The overwhelming feeling is that rent is dead money and pays off someone else’s mortgage. The reality is, though, that the vast majority of people under 30 have little choice but to adopt a ‘wait and see’ approach. Despite the inequality, the Federal Government appears to have little desire or perhaps ability to rectify this imbalance. Tax policies such as negative gearing and capital gains tax concessions favour those with capital or access to it, and even the Reserve Bank has admitted the tax breaks encourage investors to increase the prices they will pay.

Unlike in the US with the rise of Donald Trump, in the UK with Brexit and throughout Europe with the growth of right-wing parties, in Australia any middle-class resentment is still largely hidden. Although real wages and salaries have not increased much in recent years, the substantial rise in property prices has made large sections of the population feel much wealthier. However, negative gearing is the enemy of most Gen Y and Millennials wanting to find their own home, as they are outcompeted by investors. In my opinion, the days are numbered for negative gearing and the 50% capital gains tax discount in their current form.


Rick Cosier is a financial adviser and Principal of Healthy Finances Ltd. This article is general information and does not consider the circumstances of any individual.


October 28, 2016

Thank you Rick for this concise summary of the problems facing first homebuyers. The spiralling of house prices relative to wage increases over the past 20 years has been caused by a number of factors (including low interest rates, relaxation of bank lending requirements and a surge in foreign investors) however it is the taxation disparities that appear to be hitting first homebuyers the hardest.

As you point out, "....negative gearing is the enemy of most Gen Y and Millennials wanting to find their own home, as they are outcompeted by investors." This is grossly unfair and (as a Grattan Institute Report earlier this year pointed out) it is out step with housing and taxation arrangements with most other countries. Successive Governments have done nothing to address this issue for fear of upsetting vested interests. It will deservedly be a 'voter issue' for prospective first homebuyers (and their parents) going forward.

October 27, 2016

The main reason that house prices surged between 1996 and 2003 was the change in Capital Gains Tax. As Peter Martin points out in an article in the SMH, In September 1999 the government halved the headline rate of capital gains tax, making negative gearing suddenly an essential tax strategy. Whereas before, renting out a house at a loss for tax purposes had been mainly an exercise in delaying tax, because the eventual profit made selling the property would be taxed at close to the seller's marginal rate; afterwards, with the profit taxed at only half the marginal rate, it became an exercise in cutting tax.

The Government knows that if it raised the headline rate for capital gains tax, even on future purchases, it would cause a slump in home prices because investors would leave the market. However, this change may divert investment into small and medium size businesses who still benefit from CGT exemptions when the money is paid into the superannuation fund of the owners. It would definitely make it easier for first home buyers to enter the market.

October 27, 2016

First home buyers don’t buy the 'median' house, they buy in the bottom. Half of all houses cost less than the median, so they buy in the bottom quarter or lower! Now do the numbers and the story is far less pessimistic. If they’re whingeing with mortgage rates at 4%, wait till rates are 7% or 10%.


Leave a Comment:



Three ways to match housing affordability with good returns

Tax reform favours apartments and owner-occupiers

How investment property returns depend on politics


Most viewed in recent weeks

10 reasons wealthy homeowners shouldn't receive welfare

The RBA Governor says rising house prices are due to "the design of our taxation and social security systems". The OECD says "the prolonged boom in house prices has inflated the wealth of many pensioners without impacting their pension eligibility." What's your view?

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Latest Updates


$1 billion and counting: how consultants maximise fees

Despite cutbacks in public service staff, we are spending over a billion dollars a year with five consulting firms. There is little public scrutiny on the value for money. How do consultants decide what to charge?

Investment strategies

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Financial planning

Reducing the $5,300 upfront cost of financial advice

Many financial advisers have left the industry because it costs more to produce advice than is charged as an up-front fee. Advisers are valued by those who use them while the unadvised don’t see the need to pay.


Many people misunderstand what life expectancy means

Life expectancy numbers are often interpreted as the likely maximum age of a person but that is incorrect. Here are three reasons why the odds are in favor of people outliving life expectancy estimates.

Investment strategies

Slowing global trade not the threat investors fear

Investors ask whether global supply chains were stretched too far and too complex, and following COVID, is globalisation dead? New research suggests the impact on investment returns will not be as great as feared.

Investment strategies

Wealth doesn’t equal wisdom for 'sophisticated' investors

'Sophisticated' investors can be offered securities without the usual disclosure requirements given to everyday investors, but far more people now qualify than was ever intended. Many are far from sophisticated.

Investment strategies

Is the golden era for active fund managers ending?

Most active fund managers are the beneficiaries of a confluence of favourable events. As future strong returns look challenging, passive is rising and new investors do their own thing, a golden age may be closing.



© 2021 Morningstar, Inc. All rights reserved.

The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.