Australia | Oct 21 2009
By Chris Shaw
In the years prior to the global financial crisis Australian housing affordability was a major topic of discussion, but the easing of prices and the lowering of interest rates in the wake of the downturn considerably improved the situation, with Commonwealth Bank noting in the first quarter of this year affordability rose to its highest level since 2003.
As the bank’s economist James McIntyre notes, while the common perception was of rising interest rates being the main driver behind the lack of affordability, it was actually rising housing prices that were keeping buyers out of the market, largely thanks to a leap in prices of 27% in the 12 months to the end of June 2003 that far outpaced growth in incomes over the same period.
This trend continued into 2008, when the final interest rate hike by the Reserve Bank of Australia (RBA) in the first quarter of that year pushed the Commonwealth Bank/Housing Industry of Australia Affordability Index to its lowest level since 1984. An index reading of 105.9 indicated potential property buyers would need to set aside more than 28% of their household income to meet the required repayments on the medium first home buyer property.
Since then the official interest rate has fallen sharply and this has brought mortgage rates down with it, to the extent McIntyre notes the last six months have been the best opportunity over the past six years in affordability terms for a first home buyer looking to enter the market.
These conditions are not likely to last however, as he sees affordability returning to record lows by the second quarter of 2012 if recent house price projections prove correct. As an example of these expectations, McIntyre notes BIS Shrapnel is projecting a lift in Australian house prices of around 20% from June this year to June 2012.
Other reasons affordability is expected to decline include the fact interest rates are already moving higher and are set to rise further, with the RBA last week signalling its intention to remove the emergency rate stimulus in a prompt rather than a gradual manner. This suggests an increase in the cash rate of 0.50% is possible when the RBA meets early next month and in McIntyre’s view such a move could well be followed by a further 0.25% increase in December, with rates appearing to be on their way to 4.0-4.5% by the end of the first quarter of next year and 5.0% by late in 2010.
At the same time McIntyre expects household disposable income growth to be weak in the near-term as while hours worked should begin to tick higher, there won’t be any additional household stimulus measures from the Government. A return to strong growth in disposable income is not expected until 2011/12.
But even allowing for an eventual lift in incomes and for the forecast increases in interest rates, McIntyre believes rising house prices will again contribute the most to the expected decline in affordability, meaning the matter should again emerge as a key topic of discussion and a major issue for policymakers.
