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New research has found that rates of mortgage stress have increased across the capital cities, with repayments for an entry-priced home in Sydney now requiring 57.6 per cent of the average household income.
Domain’s latest First-Home Buyer Report has revealed that mortgage stress is more widespread in Australian cities than five years ago, mostly due to the effects of high interest rates and rising property prices.
The report said mortgage stress occurs when repayments exceed more than 30 per cent of household income.
Data showed that 24–35-year-old couples, on average wages, were widely affected by mortgage stress and struggled to make repayments on entry-level homes.
Domain’s chief of research and economics, Dr Nicola Powell, said that mortgage serviceability rates can yield insights into the current levels of housing affordability for first-time home buyers.
“Property prices aren’t the only measure of housing affordability for first home buyers. Mortgage serviceability is crucial, as it assesses a buyer’s ability to meet loan repayments,” Powell said.
Even with the recent drop in mortgage rates after the Reserve Bank of Australia’s February rate cut, Powell noted that rates are still high compared to recent years, especially with the rising debt levels.
“The aggressive rate hikes in 2022 and 2023 took a huge toll on mortgage serviceability, while soaring property prices over the past five years have pushed household debt to new highs,” Powell added.
Mortgage stress was most prevalent among entry-priced houses in capital cities where entry-priced houses account for 47.1 per cent of household income, and units require 30.7 per cent.
Powell said the proportion of income needed for an entry-priced house across the combined capitals is 19 percentage points higher than five years ago, with units rising by about 8 percentage points.
Despite Sydney and Melbourne being the only cities suffering from mortgage stress for entry-priced houses in 2019, Domain noted that all capital cities except Darwin are now affected.
Sydney and Canberra stood out as the most affected by mortgage stress, with repayments for entry-priced houses accounting for 57.6 per cent and 46.7 per cent of income, respectively.
While Darwin is currently the only city free of mortgage stress for entry-priced houses, repayments comprise 27.7 per cent of household income.
The next best city, Perth, requires 37.3 per cent, which is already above the 30 per cent threshold for mortgage stress.
Powell said the increase in mortgage stress across the capital cities shows how rising interest rates and property prices have compounded and pushed households into larger mortgage repayments.
“With houses being the most popular yet financially demanding option, it’s crucial for first home buyers to understand mortgage serviceability to ensure sustainable home ownership and avoid future financial strain,” Powell said.
For entry-priced units, the report observed that the situation is “more encouraging” with repayments for entry-priced units in Darwin, Perth, Canberra, and Melbourne requiring below 30 per cent of the average income.
Darwin was found to offer the most affordable units, with repayments requiring only 17 per cent of income, followed by Perth at 27.3 per cent, Canberra at 26.5 per cent, Melbourne at 27.5 per cent, and Hobart at 29.1 per cent.
Units in Brisbane and Sydney registered as the least affordable, with unit repayments taking up 34.4 per cent and 35.8 per cent of income, respectively, followed by Adelaide at 30.8 per cent.
Following the current property market, Powell said that levels of mortgage stress could steadily ease over the years.
“The broader property market slowdown, easing prices, easing prices and cash rate cuts point to gradual relief,” Powell said.
“However, lower cash rates can also boost borrowing power, potentially pushing prices up, especially with more rate cuts on the horizon,” she added.
Nevertheless, Powell highlighted that issues such as housing undersupply persist and that it is crucial to ensure “adequate, affordable, and sustainable housing into the future.”
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