Smashing the avocado myth: cutting brunch won't pay home deposit

Key findings:

• It is no longer feasible for many 25 –34- year-olds to independently save a deposit needed to enter the property market
• 74 percent of young adult renters reported they had less than $5,000 in savings, nowhere near enough for a deposit on a home
• Approximately 40 percent of 25–34-year-old homeowner hopefuls expect to call on the ‘Bank of Mum and Dad’ to achieve their home ownership dream

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

“Rapidly rising house prices and increases in the cost of living have made the challenge of buying a home much worse, with households—even those on moderate incomes—unable to keep pace with market increases through their usual saving and budgeting strategies,” says lead researcher Dr Laurence Troy, Senior Lecturer in Urbanism at the Sydney School of Architecture, Design and Planning.

Those surveyed are in an age bracket that traditionally would be expected to have bought, or be about to buy, their first home; with only about 40 percent of respondents in Sydney and 47 percent in Perth having already become homeowners. This is compared with 62 percent of Generation X and 66 percent of Baby Boomers when they were the same age according to ABS data.

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 addition to the survey, we gave financial diaries to 20 households to explore the complexities of spending and saving habits,” said Dr Troy.

“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, entertainment 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, young adults are focused 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,” said Dr Troy.

Family support is key

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

“The financial diaries also showed that for 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.”

Erratic, uncertain and unstable incomes further hamper the ability to save

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

Incomes struggle to stretch to meet required deposit

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

“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 better plan and divert a larger share of income to savings. This also enabled lower income earners to consistently save.

“However, if only those with families who can 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.”

What needs to happen?

Dr Troy argues that “Government policy in support of home ownership should move away from giving subsidy in aid of short-term housing deposit challenges, and instead focus on removing long term risks and uncertainties generated through rising asset prices, rising interest rates and precarious labour markets.

“Government should wind back tax concessions given to property investors that supports increasingly polarised and unequal wealth accumulation at the expense of those increasingly locked out of home ownership. They should also direct housing expenditure towards supporting supply of social and affordable housing.

“Regarding deposits 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 given the huge rise in house prices, 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.

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 (such as stamp duty exemptions and 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.