Housing becoming progressively more affordable

The cost burden of property ownership has fallen over the past three years as a series of interest rate cuts lowered the monthly mortgage repayments needed to buy a median-priced property, but the latest HIA-Commonwealth Bank Housing Affordability Index shows the trend is starting to turn.

Housing became progressively more affordable in each quarter from December 2010 to September 2013 amid falling interest rates and moderate house price growth, the HIA-Commonwealth Bank Housing Affordability Index showed.

But the latest reading of the Index found that in the December 2013 quarter affordability dropped for the first time in three years, by 0.4 percentage points.

The Affordability Index fell in Hobart (-9.2%), Sydney (-4.4%), Perth (-2.5%), Brisbane (-1.0%) and the Australian Capital Territory (-1.2%). Meanwhile, affordability in Adelaide and Melbourne rose by 5.5% during the quarter.

The lower affordability measures were due to more rapid house price growth rather than interest rate movements.

Interest rates available from lenders are flat and still coming down in some cases. But in the last three months of 2013, the median property price rose by enough to outweigh the effect of lower borrowing costs.

Reserve Bank of Australia governor Glenn Stevens noted recently that dwelling prices had increased by 10% in the past year and were now about 5% above their previous peak in 2010.

The Affordability Index shows the dollar value of monthly mortgage repayments on a median priced property increased to $2,500 in December 2013 from $2,458 in the previous quarter as the median property price rose by $11,400 to $470,400.

HIA chief economist Harley Dale expects the housing market to continue to run for a while from here on price momentum.

“While the rate of growth will be slower in 2014 than in 2013, I don’t think it will grind to a halt. There will be more gains this year,” he told Property Observer. 

How much further the market could rise would depend on a range of factors such as unemployment and household earnings growth.

“There’s some uncertainty around those key determinants of how people view their housing decisions,” Dale said. “That’s all consistent with the rate of price growth slowing but how long it takes our labour and wage markets to reach the end of their cycle is going to be a big determinant of how soon we reach a peak in house prices this cycle.”

On the other side of the affordability equation, few economists believe interest rates will fall further.  Westpac chief economist Bill Evans, who had previously been predicting two extra rate cuts this year, changed his mind in mid-March saying the next movement would be up, but not until sometime in 2015.

HSBC’s Paul Bloxham is forecasting a rise in rates by the end of this year.

Dale said he also believes interest rates have stopped falling. “But it looks like they’re going to remain low for a period of time. The cost of borrowing will be at or near record lows through the rest of 2014,” he added.

With house prices expected to increase further, household earnings subdued and interest rates on hold or rising, housing is likely to become even less affordable through the year.

Ironically, Dale expects people who are already in the housing market to feel the change the most.

“The strong cyclical improvement to affordability for existing participants in the home ownership market has therefore run its course,” he said.

Home owners and investors who are already in the housing market have been able to take advantage of the much lower cost of borrowing by paying down mortgage debt more quickly than needed and upgrading their homes or investing in additional property.

The latest RBA figures showing almost that in aggregate, households held 15% of their outstanding mortgage balances in mortgage offset and redraw facilities. That’s the equivalent of around 24 months of total scheduled repayments at current interest rates.

When interest rates rise, households will have less capacity to keep reducing their debts.

Investors, most of whom already own at least their home, have been the most active players in the property market. Existing owner occupiers have also been upgrading their homes.

But an analysis of mortgage lending by Westpac earlier this month suggests that those markets may be starting to slow. “After a robust 13.7% rise in 2013, owner occupier finance approvals may be starting to 'top out',” Westpac senior economist Matthew Hassan noted. Meanwhile investor finance reduced by 3.3% in January, following 40.4% growth over 2013.

The RBA is still concerned that investors are taking on too much debt and people are assuming prices can only go up.

“We need to be alert to the possibility that the past year of strong rises in dwelling prices leads people to assume that this is the norm,” Stevens said in a recent speech. “Were such an assumption to lead to increasing speculative activity, accompanied by a renewed increase in household leverage with all the associated risks to the housing market and the economy more generally, that would be unwelcome ... We are watching this closely, and we remind people that house prices can go down as well as up.”

Lower affordability will also affect first home buyers, of course, but those people have largely been out of the market anyway. They face bigger problems in getting a toehold in the market, such as raising enough for a deposit.