Housing affordability at highest level since September 2009, led by improvements in Perth and Adelaide: HIA/CBA index

Perth and Adelaide have led a sixth straight quarter of improving housing affordability in the June quarter, taking the HIA-Commonwealth Bank Housing Affordability Index to its highest level since September 2009.

The index improved by 1.1% (0.7 points) in the June 2012 quarter to be 10.6% (6.0 points) higher over the year with an index value of 62.5.

Two years ago the index stood at 52.5.

The affordability multiple – number of average full-time adult wages required to affordably service a mortgage on a median-priced dwelling – improved slightly from 1.62 to 1.6. Two years ago it stood at 1.91.

Affordability peaked in March 2009 quarter, at a time when the cash rate was falling to its lowest level as the RBA cut rates steeply to counter the effects of the GFC. Between December 2008 and April 2009 the cash rate fell from 5.25% to 3% with 100-basis-point rate cuts in December 2008 and February 2009. These rate cuts followed state governments introducing the boosted first-home owners' grant, which provided up to $14,000 in additional handouts.

The chart below illustrates this improving affordability picture but also shows that  affordability in capital cities (the grey line) has flattened out, while there has been a sharper improvement in affordability in housing markets outside of capital cities (the black line).

"Excluding the GFC period when interest rates dropped sharply, housing affordability is at its healthiest level since 2003," says HIA chief economist Dr Harley Dale.

"That is heartening news for Australian households."

"Now is a great time to buy for those who are financially set to take that decision," Dale says.

Perth’s affordability index improved from 59.7 to 62.5, and Adelaide’s affordability index improved from 65.9 to 70.

Affordability in Perth was driven by average monthly loan repayments falling from $3,331 to $3,184.

There was a small improvement in Sydney – 50.1 to 51.9 – but it remains the least affordable capital city in Australia.

Affordability worsened slightly in Melbourne (60.3 to 59.3) and in Brisbane (65.5 to 64.7).

Outside of the capital cities, affordability improved everywhere except South Australia and Western Australia.

"The recent improvement in affordability is welcome news for those trying to get a foothold into or advance within the housing market," says Dale. "It is also an encouraging bright spot for an industry that, in terms of current activity, remains a clear area of weakness within the Australian economy."

"The improvement in housing affordability is largely cyclical and there remains considerable work to be done to address the high and inefficient taxation embedded in housing, especially for new homes."

"Policy reform remains very slow, to the detriment of households, businesses, and overall economic performance," adds Dale.