Deposit gap growing as property prices surge

First-home hopefuls now need to save tens of thousands of dollars extra for their deposit

Deposit gap growing as property prices surge


By Mina Martin

With property prices surging away, first-home hopefuls will likely face a deposit gap growing faster than they can save, a new analysis has suggested.

Those who have saved what they thought was a 20% deposit for a new home could now need to find tens of thousands of dollars extra.

In Sydney, for instance, a 20% deposit on a median house valued at $1.6 million now costs $320,000. That’s nearly a $80,000 jump from what would have been a $240,000 deposit a year ago on an average house valued at some $1.2 million.

Pushing house prices higher were the ultra-low interest rates that allowed homebuyers to borrow more, plus a shift to remote work that prompted them to seek more spacious accommodation. In reality though, few are saving that extra $80,000 a year out of their wages, and many are getting help from homeowning family members.

“When house prices rise, the deposit gap increases, and in addition, record-low interest rates make it virtually impossible for you to gain any return on the savings you’ve accumulated,” Saul Eslake, independent economist and principal at Corinna Economic Advisory, told The Sydney Morning Herald. “Depending on how much interest rates rise, it’s possible that gap between the interest rates on the deposit, and the rate of increase in house prices, could narrow. It still isn’t helping you very much.”

Eslake expects the rate of house price growth to slow down, which could encourage home buyers, but warns of more competition from investors. With interest rates dropping, it meant affordability had not deteriorated much, but the trend of seeking parental help to get a mortgage is set to continue.

“People will find the only way they can get into the housing market is by tapping into their inheritance early,” Eslake said.

At Foster Ramsay Finance, 20% to 30% of first-home buyers who have settled in the past three to four months had saved all the deposit themselves, while the rest had some assistance such as a parental guarantee or cash gift.

“All have been involved in multiple offer scenarios, and they would have made formal offers on probably a dozen-plus properties, most of them, so securing the right home is exceptionally difficult if there’s an intense amount of competition,” Chris Foster-Ramsay, principal finance broker at Foster Ramsay Finance, told the Herald.

The Melbourne-based broker said that as prices rises above a client’s budget, some came back to him with their own solution – to tap into the “Bank of Mum and Dad.”

“That solution is usually family help of some description,” Foster-Ramsay said. “The conversation will be: ‘We keep missing out on XYZ, we want to live in that area, the prices keep going up, so our parents have said to us, we’ll help you out’.”

Michael Brown, principal at Mortgage Broker Sydney, said some first-home buyers started to shelve their plans from June last year when they realised they could not save fast enough to match the price increases.

“I also had some others who were fortunate enough to be able to make a withdrawal at the Bank of Mum and Dad, and a couple who were able to use what we call a family pledge or a family guarantee,” Brown told the Herald. “A lot of the first-home buyers have sufficient income to be able to afford these larger loans that are around at the moment, but they are struggling to be able to stump up the extra $10,000 or $15,000 that they need to make it a viable transaction.”

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