Hold the avo: young buyers hungry for deposits

Spending on ‘smashed avocado’ brunches and other frivolous items is definitely not a lifestyle option for young people saving for their first home, no matter what their income level, new research claims.  

And family support has become key for many young adults to achieve their home ownership dreams.

The research, ‘Pathways to home ownership in an age of uncertainty’, undertaken for the Australian Housing and Urban Research Institute (AHURI) by teams from University of Sydney and Curtin University, examines how young householders aged 25 to 34 in Sydney and Perth are adapting their spending, saving habits and living arrangements to be able to buy a home.

And the conclusions they reach make sorry reading for young people hoping to break into the home ownership market – and for most of them that means apartments. The findings include:

• While they could probably afford to pay a mortgage, it is no longer feasible for many 25–34 year olds to independently save up enough for the deposit they need to get into the property market
• 74 per cent of young adult renters reported they had less than $5,000 in savings, not nearly enough for a home loan deposit
• Approximately 40 per cent of 25–34 year old homeowner hopefuls expect to call on the bank of Mum and Dad to achieve their home ownership dream.

Rapidly rising house prices and increases in the cost of living have made the challenge of buying a home much tougher, with households—even those on moderate incomes—unable to keep pace with market increases through their usual saving and budgeting strategies.

The people surveyed in the research are in the age bracket that traditionally would be expected to have bought, or be about to buy, their first home; with about 40 per cent of respondents in Sydney and 47 per cent in Perth having already become home owners.

“In addition to the survey, we gave financial diaries to 20 households to explore deeper the complexities of spending and saving habits,” said lead author of the research, Dr Laurence Troy of the University of Sydney.

“The diaries confirmed that young adults are actively using strategies to support saving, such as minimising discretionary spending and paying ahead on utility bills. They’re not spending much on eating out, going out or going on holidays, with the most common saving strategies being cooking at home—including relying on meals of 2-minute noodles!—and spending less on clothing and household items.

“Instead, the young adults are focussed on paying reoccurring items such as food, petrol and debts, with the biggest challenges being the large irregular, and often unexpected, expenditures such as car repairs and professional insurances.”

Family support key

A key finding is that 40 per cent of the over 850 young adults surveyed for this research stated that they expected some form of financial support from their family towards buying their new home in the future.

‘The financial diaries also showed that for the young people living in Sydney, family support was essential for those who had bought a home,’ said Dr Troy. ‘For the people living in Perth, it was still possible to buy a home without direct family help, although a number did benefit from both financial and non-financial support from family.’

The major problem the research identified is that young people’s incomes are erratic or are just not high enough to save for a deposit on a property. Over 70 per cent of the 25–34 year olds surveyed have had multiple jobs in the last five years, revealing the instability of work that young people experience, while more than 40 per cent are currently looking for more hours of work. As a consequence, over 74 per cent of renters across both cities reported they had less than $5,000 in savings.

Struggle to raise deposits

With a 20 per cent deposit on the median dwelling price in Sydney being $220,000 and $106,000 in Perth, more than 95 per cent of the young adult renters surveyed do not come close to having accumulated enough savings for a deposit on a home loan.

“One of the most important saving strategies to emerge was living with parents or in properties owned by parents,” said Dr Troy. “This meant a combination of little or no rent, utilities and food, and reduced spending in all major necessity categories.

“As a result, people can plan better and a larger share of income could be diverted to savings, and this also enabled lower income earners to consistently save.

“However, if only those with families who are able to provide support can do so, then those who don’t have supportive family are potentially locked-out of home ownership altogether. And by extension, locked-out of the important wealth building dimension that housing provides, particularly into retirement.’

Mortgage less than rent

Ultimately the research highlights that while many young adults are in a situation where they would be able to afford the ongoing mortgage payments (often likely to be similar or even less than the rent they already pay), the major barrier they face is the ability to save up for the deposit they need to get into the property market.

“In the past, we had certain rules and assumptions, for example, the gold standard was the size of a mortgage should be no more than four times your annual income, but these are now irrelevant. Instead, we observe all-options-on-the table attempts to scramble together enough cash to buy into the market,” says Dr Troy.

“The idea that there is a particular financial strategy that is suitable for the average household aspiring to home ownership is increasingly problematic. Generally, the strategy is to save as much as possible, reduce spending and call in favours from family.”

Interestingly, the diary participants did not see government support as essential in their journey towards buying a home. This suggests that current government supports at the point of purchase (e.g. stamp duty exemptions, grants) have by and large only succeeded in bringing forward home purchases for those already in a position to buy, and have been relatively unsuccessful in allowing more households to become home buyers.

Such policy measures do not address the root of the problem: they are focused on aiding individual households to compete in the housing market, rather than changing the structural issues affecting availability and affordability within the housing market itself .

The report can be downloaded from the AHURI website at http://www.ahuri.edu.au/research/final-reports/395