INTEREST RATE HIKES CONTINUE TO MAKE HOUSING LESS AFFORDABLE

HIGHLIGHTS:

 The RBA continues to drive down housing affordability.

 Further hikes to come, combined with tight rental markets, low unemployment and the return of overseas arrivals, threaten to worsen the affordability situation.

 This is being compounded by Australia’s regulators making it unattractive to lend to first home buyers and those with deposits of less than 20 per cent

The HIA Affordability index measures the extent to which average weekly earnings can repay and service a mortgage for a median-priced dwelling. The index is calculated based on prevailing mortgage interest rates, average weekly earnings and median home prices. The concept of affordability essentially explores the proportion of earnings absorbed by servicing costs on a 25 year mortgage with a 90 per cent Loan-to-Valuation-Ratio at inception An index reading of 100 indicates the threshold for ‘affordable’ market whereby mortgage repayments account for exactly 30 per cent of average earnings under current market conditions. An index level above 100 indicates an affordable market and an index level below 100 indicates an unaffordable market. When the index level is rising affordability is considered to be improving while a decline in the index indicates a deterioration in affordability.

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This is the least affordable Australian housing has been in over a decade. It now requires very nearly 1.6 average incomes to affordably service a mortgage on a median-priced home in Australia’s capitals, and more than 1.4 incomes in Australia’s regions.

The regions led the decline in the most recent quarter, down by 2.8 per cent, while the capitals declined by 1.9 per cent. Every capital and region deteriorated in the December 2022 Quarter, with only one exception – Brisbane.

Even with house prices having come down, the pace of the RBA’s hiking cycle has more than offset this – and ongoing wage gains – worsening affordability overall.

Unfortunately, with further rate hikes flagged as likely by the RBA, further deterioration in affordability is likely. This is especially true if wage growth remains lacklustre and dwelling prices are supported by tight rental markets, low unemployment rates and the rapid return of overseas migrants, students and tourists.

Not only does this put the building industry through the boom and bust cycles it also jeopardises the Australian government’s goal of a million new homes built between 2024 and 2028. This will undermine housing affordability for years to come, pushing the dream of homeownership out of reach of more and more Australians.

These challenges are being compounded by Australia’s regulators seeking to create an “unquestionably strong” financial sector, at the cost of making it increasingly costly to lend to first home buyers and those with deposits of less than 20 per cent. For as long as it can take more than decade to save a sufficient deposit, housing will not be accessible for a great number of Australians

HIA HOUSING AFFORDABILITY INDEX, AUSTRALIA

Hia

INDEX FOR AUSTRALIA'S EIGHT CAPITAL CITIES

Interpreting the Affordability Index

For homeowners, an index reading of 100 indicates the threshold for an ‘affordable’ market whereby mortgage repayments account for exactly 30 per cent of average earnings under current market conditions. An index level above 100 indicates an affordable market and an index level below 100 indicates an unaffordable market. When the index level is rising affordability is considered to be improving while a decline in the index indicates a deterioration in affordability

Methodology note:

The dwelling price data in this report are based on the monthly simple median price data and hedonic price series in each of the relevant markets as compiled by CoreLogic. It is also important to note that earnings data are only available every six months, currently up to November 2022. Accordingly, earnings data for the quarters in between these statistical releases are based on HIA estimates and may be subject to revision on publication of subsequent data by the ABS