The two issues making life tough for first home buyers

Higher savings and wages have eased the time it takes to build a deposit, but the path to home ownership remains a tricky one.

A typical first-home buying couple will need to save for almost five years to build up enough money for a 20% deposit on an entry-level house, a new report released by Domain and digital lender UnLoan has revealed.

The research found that it currently takes four years and nine months for an average Australian couple aged between 25 and 34 to save up for a deposit on an entry-level house and three years and five months for an equivalent unit.

Interestingly, over the past year the timeframe has actually shortened by two months for houses and one month for units though.

In Darwin, Canberra, Hobart, Melbourne, Sydney and parts of regional Australia, the time needed to put together a deposit either fell or flatlined, while it rose in Adelaide, Brisbane and Perth.

"The higher cash rate can obviously have a positive impact on anybody that is trying to accrue a deposit because they'll be earning a better rate on their savings," explains Dr Nicola Powell, chief of research and economics at Domain.

"We've also had much better wage growth which was highlighted by the ABS data released this week which showed growth at a 14-year high.

"So with those two factors, deposits have actually been able to keep ahead of the price growth that we've seen at that entry-level price point nationally, although it wasn't the case in every city."

Despite the positive recent trend, Powell says that the deposit hurdle has generally grown over time, with noticeable increases in almost every market over the past five years.

"Buying your first home is emotional and challenging. Even though we have seen the time it takes to save for a deposit drop recently, it is still perhaps the biggest hurdle that first home buyers face.

"And it's one of the reasons why we have seen an increase in the number of individuals or couples leaning on the financial support of the Bank of Mum and Dad."

Will more priced-out buyers turn to rentvesting?

As Australia's most expensive property market it's no surprise that first home buyers in Sydney face the steepest deposit hurdle.

The report found that Sydney buyers will need to save for six years and eight months to come up with a deposit for an entry-level house - far longer than the likes of Perth (three years and ten months) and Darwin (three years and seven months).

According to Powell, these variations are likely to continue to make rentvesting - buying an investment property in one location and renting in another where you want to live - an attractive option for some first home buyers.

"I think rentvesting is one of those buzzwords that really applies to our more expensive markets, particularly Sydney where most people spend a lengthy time saving for a deposit.

"What rentvesting does is unlock opportunities to get into the market elsewhere. Australians living in very expensive markets may look to purchase in a more affordable one and then rent in the area that suits their work and their lifestyle.

"The ultimate aim is that they'll have a stake in the property market, they'll be building equity and in some markets, like Perth, they're actually more likely to get better gross rental yields."

Rate hikes boost mortgage stress

First home buyers who are able to pull together a deposit are still likely to face a second, though no less considerable, hurdle: paying for their mortgage.

"While there has been a slight reduction in the time required to save a deposit (for those who can consistently save and have experienced wage growth), higher interest rates are also making home loan repayments more difficult, which is why more people are facing mortgage stress," says Powell.

The report revealed that mortgage repayments are eating up a sizeable portion of incomes, with many first time buyers channeling more than 30% of their income towards repayments, which is the common threshold used to describe mortgage stress.

In fact, Darwin is the only city where first home buyers are generally able finance an entry-level house with less than 30% of their income. At the other end of the spectrum, buyers in Sydney will typically need to dedicate 57% of their income towards their home loan repayments.

Mortgage stress is not quite as large an issue for buyers of entry-level units though, as Sydney, Brisbane and Melbourne are the only cities where first timers will generally need to put more than 30% of their income towards their repayments.

Could Help to Buy change the game?

With the twin issues of lengthy deposit saving times and high mortgage stress weighing on first time buyers, is there anything that could help ease the situation? After all, tapping into the Bank of Mum and Dad or rentvesting aren't options available to everyone.

One initiative that Powell is optimistic about is the federal government's Help to Buy scheme which is likely to launch at some point this year.

"Help to Buy is actually one of those schemes that addresses the two pressure points that first home buyers have: deposits and mortgage affordability. Buyers can save a lower deposit and the debt they take on will be lower because the government basically has an equity stake in their home.

"The numbers are capped and it's targeted at low to middle-income earners, so I'm very interested to see the impact of Help to Buy because, on paper, it could be a game changer."

Ultimately the Help to Buy scheme will be limited in the number of buyers it can assist, which is why Powell notes that addressing the issue of housing supply more broadly is so important.

"We also need a supply-side focus. We've got the Housing Accord and the aim of 1.2 million homes over a five-year period, but when we do demand-side policies [like Help to Buy] we need to ensure that we're actually complementing them with supply at the affordable end of the spectrum.

"And affordable housing is not just about units. It's also about that missing middle of terraced homes, townhouses and duplexes. It's meeting that missing middle of affordability to allow people to make that step onto and up the property ladder."

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