How the housing crisis is reshaping retirement and the next generation’s future

For too many people, the dream of owning their own home has turned into a nightmare: even a basic house is now beyond the reach of the average Australian.

Just last week, I was talking to a tradie, who told me that three years ago he bought a place for $330,000 in a fairly ordinary suburb, and that that property is now worth $990,000, which makes him a millionaire.

His is probably not a unique experience; anecdotal evidence tells me that in the lower price brackets, property values have at least doubled in the past 3–5 years.

Does that mean everybody’s rates are about to double, too, in line with the soaring neighbourhood values? And if so, what will that do to people’s already-stretched budgets?

Purchasing a home was never easy, but at what point did it start sounding like a fever dream? Image Credit: Shutterstock

To get an idea of the challenges facing young home buyers, I asked a mortgage broker about the criteria needed to get approval for a $931,000 loan to buy a $980,000 first home with a $49,000 deposit under the government’s new scheme.

The broker told me that the first hurdle is called the serviceability test: lenders must prove that the borrower can afford the loan even if interest rates rise by three per cent.

This is where a curious little measure comes in: the Household Expenditure Measure, or HEM. It’s a benchmark based on surveys of what people spend on essentials like food, transport, and clothing. The bank uses it to estimate how much a household needs to live on—and then subtracts the HEM from income to see what’s left for mortgage repayments.

Here’s the strange part.

For a couple in their thirties earning $95,000 each—a combined income of $190,000—the HEM figure used by most lenders is around $3,500 a month, or just over $40,000 a year. It’s called the ‘floor’ for living expenses. If the applicants claim to live on less, the bank simply substitutes the HEM number for the serviceability test instead.

Yet the Association of Superannuation Funds of Australia tells us that a retired couple needs about $75,000 a year to live comfortably.

Of course, the difference comes down to purpose. The ASFA Retirement Standard aims to describe a comfortable lifestyle, including travel, dining out, and health insurance. The HEM, however, covers survival. It’s the bare minimum a household could live on without real hardship, used so lenders don’t let borrowers over-extend themselves.

Still, the result is absurd.

A young couple trying to enter the market face a lender who says, ‘We’ll assume you spend $40,000 a year and can therefore afford huge repayments.’

The working couple may technically pass the test, but in the real world, their household bills, insurances, and groceries are almost certain to push well beyond the HEM’s conservative benchmark. It’s little wonder so many borrowers feel they’re skating on thin ice. The banks’ formulas may protect the system, but they don’t reflect how people actually live.

Meanwhile, a retired couple is told they’ll need $75,000 a year to enjoy a reasonable life.

That’s why it’s so essential to make a detailed budget before buying a home. Don’t rely on what the bank’s calculator says you can afford—work out your own figures honestly by tracking your spending.

For your post-purchase budget, include the hidden costs of ownership, such as rates, insurance, and maintenance costs, and make sure there’s a buffer for interest rate rises.

A home loan is a long-term commitment, and the best defence against sleepless nights is a realistic budget built around the way you actually live.

The worst part of the housing affordability crisis is that it's turbocharging the gap between the haves and the have-nots. The Bank of Mum and Dad is now one of Australia's biggest lenders. But these resources are not available to everyone.

Meanwhile, the pool of rental properties is shrinking. I’m getting frequent emails from investors who say they’re sick of being landlords, worn down by mounting government charges, regulations, and hassles.

More and more investment properties are coming on the market, and being snapped up by first-home buyers.

Obviously, this will exacerbate the present rental shortage, pushing up rents even further and making it even harder for ordinary young people to save for a house deposit and buy their own homes.

Noel Whittaker, AM, is the author of Wills, death & taxes made simple and numerous other books on personal finance. An international bestselling author, finance and investment expert, radio broadcaster, newspaper columnist and public speaker, Noel Whittaker is one of the world’s foremost authorities on personal finance. Connect via Twitter or email ([email protected]). You can shop his personal finance books here.

Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. Always seek professional advice that takes into account your personal circumstances before making any financial decisions. The views expressed in this publication are those of the author.