New buyers lured into the market are now facing a perfect financial storm

Farheen Khan and her husband Faizan Afzal are about to achieve the great Australian dream: to buy a house where their children can grow up, with nearby parks and a good school.

“It feels very special … to have that sense of belonging to something that you’ve earned, that you’ve done for your family, for your children,” Ms. Khan said.

“A place where they grow together and make memories.”

The young family bought land on an estate in South Perth in 2020, when the federal and WA governments offered big incentives to people who wanted to build a new home.

But COVID caused a major shortage of building materials and the industry has also been dealing with a labor shortage in a market with low unemployment.

A rear view of a couple holding hands looking at their newly built home.
The young family is still waiting to move into their new home and juggling rent and mortgage payments. (ABC NewsRebecca Trigger)

You’ve seen the schedules of many new construction projects disappear.

“It’s been very, very hard,” Afzal said.

“We’re paying the mortgage, we’re paying the rent, plus bills for both properties.”

Afzal estimates that they are sacrificing 70 percent of their income on housing right now.

Couple forced to move in with their parents

It’s a familiar story for Nurse Steryn Wheeler.

He was told that a build would take six to eight months.

A woman stands in an unfinished house that is still being built.
Steyn Wheeler and her partner are building a house in High Wycombe, but have experienced significant delays.(Supplied: Steyn Wheeler)

A year and a half after signing the contract, she and her partner have had to move in with their parents in the midst of a rent crisis while they wait for their house to be finished.

He worries that rates will go even higher.

A man and a woman smiling while the woman holds flowers.
Steryn Wheeler (left) laments being locked away in home construction during the pandemic.(Supplied: Steyn Wheeler)

“You just get really nervous…especially being in your twenties, you know, the future of, are we going to have kids?” she said.

“We really can’t do that with these kinds of price increases.”

Ms. Wheeler now regrets getting locked into building a house, and meets many other young people in the same boat they bought during the pandemic.

“I think we got so caught up in wanting to have the grants and be independent and have an adult lifestyle that we forgot what we really wanted in our 20s,” she said.

“We have nowhere to go from here. We are stuck with these houses and these huge interest rates.”

Loans go up, prices go up

Data from the Australian Bureau of Statistics (ABS) shows that there was an increase in first time home buyers during the pandemic.

The amount people borrowed on average also increased over the previous two and a half years.

ABS data shows that average loans increased from $504,000 in January 2020 to $611,000 in June of this year.

Digital Finance Analytics Principal Analyst Martin North said many first-time buyers entered the market to take advantage of government incentives for homebuilders.

But those incentives also helped push prices up.

“They tended to buy with very large mortgages that they bought at the top of the market, and now there’s a pincer movement,” North said.

“Rates are going up, mortgage rates are going up, prices are starting to go down. And a lot of them are actually [now] in difficulty of financial flow”.

Martin North sits at a table
North says some first-time homebuyers will be surprised when their fixed-term interest rates expire.(ABC Illawarra: Sarah Moss)

North said that while banks were not reporting higher default rates, cash flow metrics showed where people were starting to run into trouble.

Young families under stress

His analysis of June figures shows that more than 80 percent of growing young families with a mortgage face mortgage stress, meaning they pay more than 30 percent of their income on housing.

It also warned that two- and three-year term loans from people lured by pandemic price subsidies would begin to expire later this year and early next.

“In some cases, they’re going up from a 1.99 percent mortgage rate to around 4.5 percent, so that’s a really big move,” North said.

Lady holding a wallet with 20 dollar bills.
Being organized and making simple changes can help you stay within budget.(ABC News: Jessica Hinchliffe)

March quarter data (latest available) from the Australian Prudential Regulation Authority (APRA) shows that residential loans with 30 to 89 days maturity totaled $8.9 billion nationally.

That was a slight increase from the previous quarter, but still trending lower than the previous two years.

Genworth Insurance, which estimates it commands about 40 percent of Australia’s lenders’ mortgage insurance market, warned investors in June that rising interest rates and moderating house prices were expected to lead to increased delinquency and claims.

Mass breaches ‘unlikely’

But not all analysts believe Australia should prepare for a wave of defaults by first-time homebuyers and other households experiencing financial stress.

Director of Curtin University’s Australian Housing and Urban Research Institute Stephen Rowley said that while Australia’s labor market remained strong, he did not expect to see a big rise in default rates.

“Defaults are triggered by life events, such as a relationship breakup and illness, often job loss,” said Dr. Rowley.

“Otherwise, households tend to focus their spending on housing costs and tend to cut back on discretionary spending.

“If we were to get an increase in unemployment and people were struggling to generate the kind of income that they need, then it could be a problem.”

Cascading roofs on a new housing development in Alkimos, Western Australia.
It is not known how many of the more than 800,000 people who suspended their business or mortgage loans during the pandemic are now in a position to start paying.(ABC News: Gian De Poloni)

But he predicted that delays in building new homes would make people reluctant to enter that market in the next two to three years.

“That puts additional pressure on the established market and right now there isn’t a huge amount to buy…so we’ve seen a steady rise in prices over time.

“I think we’re in a very tough market right now…we’ve got a long way to go before we get back to what we think of as sort of a normal market where [there is] a bit of slack in the rental market and a decent offer.

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