Victoria named most affordable state as rates smash home dream

The great Australian home dream is crashing out, with affordability at record lows despite the Albanese government’s May budget tanking home prices.

Victoria is now the most affordable state in the country for homebuyers, but house hunters are still worse off as soaring interest rates smash the home dream.

REA Group’s latest Housing Affordability Report, released today, revealed that for a family earning the state’s typical $127,000 income, just 16 per cent of homes sold in the past financial year were within reach without going into mortgage stress.

It’s even worse for lower income households, with warnings they may now only be able to afford a studio apartment — or an extremely regional home in need of work.

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It comes as the nation’s overall housing affordability plunged to a record low, leaving homebuyer hopefuls earning a typical $125,000 a year across the country able to access just 12 per cent of home sales across the country in the past year.

The report gauges affordability based on an income bracket’s ability to pay a mortgage with a 20 per cent deposit without spending more than 30 per cent of their wage on housing — a barrier known as mortgage stress.

Outside of Victoria, it’s the bleakest period for housing affordability since the mid 1990s — as far back as the REA Group analysis goes.

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But even Victoria’s relative affordability has its limits, and despite revelations earlier this week Melbourne’s house values are now less than they were in 2021, last year homebuyers could afford 19 per cent of homes sold — with the gap largely due to a trio of rate hikes this year.

It makes Victoria’s situation the worst since 2024 when a rush of interest rates left just a fraction of residences within reach.

It’s status as the nation’s most affordable has emerged mostly because home values in Western Australia soared far more significantly than wages in either state in the past financial year.

For those on lower incomes, $76,000, just 2 per cent of Victorian homes were within reach, the same as the national level.

Australian housing affordability has grown progressively worse since the mid 1990s.

Victoria’s situation is a little better, but only just avoided a record low.

REA Group economist Luc Redman said the reality for those households was a studio apartment or a run down house in a significantly regional area.

There is also now a more than $100,000-a-year income gap between the haves and have nots, as households with incomes in the top quartile of the state’s wages, at $232,000 and up, could afford about 70 per cent of homes.

The report also indicated the average time needed to save a deposit was now about 5.5 years for most Victorian households, though closer to 1.5 years for first-home buyers using the federal government’s 5 per cent deposit scheme.

Mr Redman said Victoria’s affordability was relative, with national housing affordability sinking to a record low after three interest-rate hikes in the past financial year and home price surges in almost every other state.

REA Group economist Luc Redman says softening home prices in Victoria have helped affordability, but interest rate hikes had overwhelmed the falls.

The share of homes a typical wage earner can afford to buy in each state.

“The softening in prices has helped … but it’s still been a deterioration from last year,” he said.

“Victoria’s wage growth hasn’t been as strong as other states for a while, but it hasn’t been significantly worse.”

The economist added that Victoria’s relative affordability was the result of a past population exodus caused by Daniel Andrews’ extensive lockdowns, Victorian government taxation of investors and the state’s relatively higher supply of new homes being built.

He added that Albanese government changes to investor tax benefits would also be a more recent factor for home price falls, but said it was still questionable whether first-home buyers were better off.

While REA Group expected they would account for a bigger share of buyers in the months ahead, he said it was quite possible this wouldn’t be from increased activity on their part — but a pull back from investors.

The time it takes to save a deposit is touching on six years, or a bit over 1.5 if you can access a 5 per cent deposit via the federal government.

“So whether it is deliberate in a way that politicians might like to claim, or if it’s a result of the economic structures that have occurred is the question,” he said.

“And how much it comes back to first-home buyers getting into the market is an interesting question, given interest rates will possibly soon be higher.

“The real solution here is supply. The only way to fix affordability for the long run is having more supply … until we fix that, affordability will continue to trend downwards.”

In the months ahead the prospect of a further interest rate rise from the Reserve Bank would determine if ongoing house price falls made the state’s affordability improve, or if homebuyers would find themselves worse off again despite values tumbling.

The report did not cover the Northern Territory or Australian Capital Territory.

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