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When Adam Farrugia and his then-fiancee Danielle bought their first home in 2004, they stretched their budget: they paid $335,000 for their three-bedroom Rowville house.
“I know this is going to sound insane,” Farrugia, 44, said. “But our budget when we first started was about $265,000 … so that felt like a very big stretch for us.”
They negotiated the price down from $350,000, put in their offer (subject to finance), and 120 days later settled on their first home. Farrugia was 22, and it was just a year after he had finished his engineering degree.
In October last year, the couple, now married with teenage children, bought a new home in Endeavour Hills, and are on a bridging loan as they wait to sell their first house.
They recently had the Rowville home valued: it’s worth at least three times what they paid.
In 2006, the median house value in Melbourne was just under $356,000. By 2021, not a single house in Melbourne could be bought for that price, Cotality data shows.
Cotality head of research Tim Lawless said a run of historically low interest rates and ideal lending conditions had helped the share of homes under the 2006 median trickle down to zero in less than two decades.
But what he found more concerning was how far house prices and wages had diverged.
“In the last 20 years … wages are up 79 per cent, housing values are up 167 per cent,” he said.
“So you can see there’s a clear mismatch.”
Lawless said this meant the cost of servicing a mortgage in 2026 had put a cap on what someone could feasibly consider an affordable option.
“It’s a market where affordability constraints are much more challenging than what they were 20 years ago,” he said.
A family home in the 75th percentile, or top quarter, of houses would have set you back $487,189 in 2006. Just 0.1 per cent of houses are below that marker now.
Only 1.8 per cent of units are under the 2006 Melbourne median.
The federal government has indicated it plans to change the capital gains tax discount and negative gearing in its budget on Tuesday, with the hope of addressing intergenerational inequality and giving first home buyers a greater stake in the economy.
PRD Real Estate chief economist Dr Diaswati Mardiasmo said the idea of what “affordability” means has shifted.
“Ten years ago, maybe even 15 years ago, when people said, ‘Oh, it’s affordable’, the notion was ... it’s cheap, everybody can afford it,” she said.
“Now, affordability is more of a spectrum. It’s affordable according to whom, in what price bracket, and in comparison to what?”
Mardiasmo said this divide between generations, and what each section of the market considered affordable, has led to a recalibration for buyers.
“Our mindset has had to shift,” she said. “Because if it didn’t, to be honest, I think we would not be able to cope with what it means to live with the prices that are currently available.
“We’d all have mental breakdowns.”
Farrugia’s broker, Natalie Weeks at Loan Market Rowville, said she saw many first home buyers stretching to their limits just to get into the market.
“Even with maximum borrowing power, we’re increasingly seeing that it’s still not enough,” she said.
“As a result, the bank of mum and dad is now playing a much bigger role with more buyers.”
It’s something that plays on Farrugia’s mind.
“I am quite fearful for my kids,” he said.
He felt lucky to have the equity to upsize as his 16-year-old daughter and 12-year-old son grow older and need more space, but knows his children won’t have it easy when it’s their turn to buy.
“Once we get our place under control, that will be my next thing … just to try to be able to support them because I don’t see them [buying a house] themselves,” he said.
Mardiasmo said younger would-be home owners were already looking at alternatives, from tiny homes, granny flats and shared occupancy through to opting out of ownership altogether.
“They’re no longer liking the idea that they may be tied down to a debt for 30 years,” she said.
Lawless thought it was unlikely the housing market would experience another period of soaring prices like the past 20 years, which could be some relief to those thinking about their prospects of buying a home – or their children’s.
With an already much sharper ratio of house prices compared with incomes, more money was needed to service a standard mortgage in the past, which would mean “lenders will be more cautious around serviceability levels, so will regulators,” he said.
“And I don’t think the market’s going to have the benefit of a long-term trend of falling interest rates to support demand.”
