Summary: Australian housing is often called “unaffordable” both in a local context and when compared to international markets. This conclusion is often drawn by comparing incomes with house prices. But it’s more appropriate to measure incomes against loan repayments, as this is the essence of affordability.
Key take-out: The average weekly home loan repayment has fallen from a peak of $546 in the June quarter of 2011 to $467 in the March quarter of 2014.
Key beneficiaries: General investors. Category: Property investment.
Australia’s capital city housing markets remain robust, resilient and reliable. Good news directly for homeowners, investors and tenants – and indirectly for governments, the economy and naturally the community at large.
Despite the undeniable positives of Australian capital city housing markets that continue to stand the test of time, shallow measures of market performance can undermine confidence in the underlying health of market outcomes.
A notable example of this is the repeated assertion that Australian housing is “unaffordable” both in a local context and also when compared to other international housing markets.
Proponents of Australian housing “unaffordability” typically rely on measures that compare the level of incomes with house prices. The International Monetary Fund (IMF) provides a typical example with its international House Price-to-Income Ratio series that recently placed Australia as the third highest unaffordable country on its measure behind Belgium and Canada – stating definitively that “house prices continue to be out of reach of household incomes in many countries”.
The surge in housing market activity and prices growth over the past two years has in fact reflected a significant improvement in real housing affordability generally in Australia. The key driver of this improvement has, as usual, been a sharp decline in the official cash rate, which fell from 4.75 per cent in November 2011 to just 2.5 per cent in August 2013 – the lowest rate in 60 years.
As a predictable consequence of sharply lower mortgage lending rates, Australia’s strong underlying aspiration for home ownership and confidence in residential investment activated buyers and released pent-up demand.
Naturally this release was underscored by the continued overall solid performance of the Australian economy: relatively low unemployment, steadily rising incomes and jobs growth. The improvement in affordability, the subsequent release of pent-up demand and the impact on prices growth is indicated by changes to average mortgage repayments as interest rates fell.
Using Australian Bureau of Statistics (ABS) average home loan data, Reserve Bank indicator rates and a typical variable loan structure, the average weekly Australian loan repayment fell from its peak of $546 recorded over the June quarter of 2011 to just $450 a week over the September quarter 2013.
Although average weekly home loan repayments increased slightly to $467 a week over the March quarter 2014 this is no surprise given the recent strong growth in house prices requiring higher loans.
The improvement in affordability from low interest rates has activated homebuyers and investors with increased demand, predictably translating into price growth.
The Australia median house price has increased from its previous trough point over the December quarter 2011 of $533,738, to $614,026 over the March quarter 2014. A 15% fall in average loan repayments since 2011 has therefore translated into a 15% increase in house prices – an uncanny coincidence? Or just a reinforcement of the underlying stable mechanics of Australia’s housing markets?
And in regard to incomes versus prices affordability models, it’s logically more appropriate to measure incomes versus loan repayments because this is the essence of affordability – the capacity of incomes to service mortgages.
The proportion of the median Australian weekly disposable income required for the average home loan repayment has fallen from a peak of 35.6 per cent recorded over the June quarter of 2011 to a the low point of 26.9 per cent over the September quarter 2013.
The March quarter measure of 27.5 per cent also remains well below the seven-year average of 32 per cent.
The impact of historically low interest rates and rising incomes from a solid local economy has clearly improved housing affordability generally in Australia, tapping into strong underlying demand. Unsurprisingly this has led to the strongest house prices growth recorded since the previous affordability peak in 2009/10.
The nature of house prices growth in Australia remains sustainable over the medium to longer-term as the market continues to adjust rationally to shorter-term changes in affordability that create and release pent-up demand.
The underlying drivers of a robust local economy and strong aspiration for home ownership and residential investment, together with the unique local supply and demand mechanics of the housing market, will continue to maintain the underlying strength and long-term durability of Australia’s capital city housing markets.
Dr Andrew Wilson is the Domain group senior economist. Follow him on Twitter @DocAndrewWilson or listen to him on The Property Hour on Radio 2UE on Saturdays from 2pm to 3pm.
This article was originally published in Australian Property Investor Magazine – republished with permission