Housing Affordability: A Different Take On Eastern Suburbs Property Prices

Since midway through 2019, Sydney’s property market has been charging ahead.

By the end of February 2020, Sydney’s average dwelling price stood at $872,934 according to CoreLogic's figures.

This means, following two years of declining prices, property values are now more-or-less back to where they were at their 2017 peak.

Rising property prices always raises the question of housing affordability. This is understandable when you consider that across Sydney, the average dwelling price rose from 6.6 times the average income in 2009 to 8.2 times the average income by 2019 - and that’s before the recent price gains.

In Sydney’s Eastern Suburbs, where property values are among the highest in the country, the gap between the average Australian wage and the average dwelling price is larger still.

Interest rates the other side of the equation

But looking at property prices in isolation - or even the price-to-income ratio - only tells part of the story. When it comes to housing affordability, the most important thing to consider is what it costs to actually live in your house.

As most buyers purchase their home with the help of a mortgage, this means calculating your home loan repayments.

Here, interest rates are obviously one of the most important factors. And, for the past 10 years, they’ve been doing more or less the exact opposite of property prices.

In 2008, just before the Global Financial Crisis hit, the RBA’s official cash rate stood at 7.25%. While it was subsequently cut to 3% to help stimulate the economy, by 2011 the cash rate had again lifted to 4.75%. This had a massive impact on home loan interest rates.

In 2008, when the official cash rate was 7.25%, borrowers could expect to pay a standard variable rate of 9.6%. Over 2010-11, the average standard variable rate was 7.6%.

On a $1 million principal and interest mortgage taken over 25 years, your monthly repayments would be:

  • $8,817 when the standard variable rate was 9.6% (2008)
  • $7,455 when the standard variable rate was 7.6% (2011).

Fast forward to today

In today’s mortgage market, where a home loan of around 3.5% is more normal, the repayments on a $1 million loan are closer to $5,000.

In fact, you’d have to borrow around $1.5 million to match the same repayments as a $1 million loan at 7.6% and over $1.75 million to match the same repayments you’d be making if interest rates were 9.6%.

This could explain at least some part of the massive price rises over the past 10 years. It also goes some way towards showing that, even though house prices may have risen dramatically, housing affordability may not be as bad as you think - at least when it comes to paying back a loan.

What are the issues?

There are two issues we need to mention.

First, even though money is cheaper than it has been, people need to borrow more of it. This leaves them more vulnerable to potential interest rate rises. But, given the current economic climate, any major rate rise looks to be some way off.

Second, while thanks to low-interest rates it may not be too difficult to service a loan, it’s extremely difficult for first home buyers to get into the market because saving up the 20% deposit can be close to impossible. On a home valued at $800,000 a 20% deposit is $160,000. On a home worth $1.2 million, it’s $240,000.

While both State and Commonwealth governments are trying to help make it easier for first home buyers through First Home Owner Grants, stamp duty exemptions and the First Home Loan Deposit Scheme, the reality is that very few properties in the Eastern Suburbs meet the thresholds.

We’re seeing more first home buyers turning to family members for help to get a foot on the property ladder. And the nature of those first home buyers is changing too. People are often delaying buying their first home until well into their 40s and then making a move into what will be their family home - often something in the $2 million to $3 million range.

That means we’re seeing people borrow more and rely on their capacity to pay off a substantial loan.

A new environment

Each of these factors is contributing to real change in the Eastern Suburbs real estate landscape.

Get in touch if you’d like to know what it means for you.

Download our 2018/2019
Eastern Suburbs Market Report

Next Insight

The New Downsizers In Sydney’s Eastern Suburbs