Housing affordability reaches three decade low

PropTrack’s new Housing Affordability Index – which measures the share of properties a household can afford to buy – has fallen to its lowest level since records began in 1995.

Part of a comprehensive report into housing affordability, the analysis also found aspiring homeowners would need to save for more than six years in some states to build up an adequate house deposit, while higher interest rates have made it just about harder than ever to service a mortgage.

PropTrack senior economist and author of the report Angus Moore says the deterioration in affordability has been driven by sharply higher interest rates and rising home prices over recent years.

“Highlighting the alarming state of housing affordability at current interest rates, a household earning the median, or typical, income in Australia can now afford just 13% of homes sold across the country,” Mr Moore said.

It’s a dramatic turn of events since early 2022, when a median-income household could afford almost 40% of homes sold across Australia.

“The big cause of the decline in affordability we've seen in the past year-and-a-bit is the rapid increase in interest rates we've seen,” Mr Moore explained.

Between May 2022 and June 2023, the Reserve Bank of Australia raised the cash rate from 0.1% to 4.1%, the fastest pace of rate hikes since the late 1980s.

“Mortgages are much more expensive and, as a result, the amount people are able to borrow has fallen substantially - as much as 30% compared to late 2021,” Mr Moore said.

“That means buyers can't afford to borrow as much as they used to and, therefore, far fewer homes are within their budgets.”

At the same time, existing borrowers have faced sharp increases in mortgage repayments, surging as much as 50% since interest rates began rising last year.

Mr Moore says as a result, servicing a mortgage is close to as hard as it has ever been, just below the peak reached in 1989.

“A household earning the average income would need to spend about a third of their income on mortgage repayments to buy a median-priced home,” he said.

“That represents the highest level since 1990, exceeding the most recent peak set in 2008.”

Affordability worst in NSW, Tasmania and Victoria

While affordability is tough across Australia, Mr Moore says it's especially challenging for buyers in New South Wales, Tasmania and Victoria.

New South Wales retains the title of the least affordable state, which it’s held for most of the past 30 years.

Affordability has significantly deteriorated in Tasmania in recent years, shifting from being one of the most affordable states in 2018 and 2019, to the second least affordable state in 2023.

“Since 2019 prices have surged, rising by more than 50% in Hobart, and 70% in regional Tasmania,” Mr Moore said.

“In contrast, WA has gone from the least affordable state across Australia during the 2007 to 2010 mining boom, to being the most affordable state today.”

Housing affordability remains below the national average in Victoria, deteriorating rapidly over the past 12-18 months as interest rates rose.

“Rising household incomes since the pandemic following improved labour market conditions, which has drawn more people into employment and boosted wages growth, has been insufficient to offset higher home prices and, critically, the surge in mortgage rates.”

Higher property prices push out saving timelines

As well as mortgage serviceability, the report also measures housing ‘accessibility’ – the time it takes first-home buyers to save for a home deposit.

It found an average-income household would need to save 20% of their income for more than five and a half years to achieve a 20% deposit on a median priced home.

In NSW, that timeline blows out to almost seven years. In Victoria, an average income household would need to save for 6.2 years, and South Australians would take a little longer than six years.

While stronger wages and property price falls throughout 2022 have shaved around six months off saving times nationally since the 2021 peak, Mr Moore says saving a deposit remains a key barrier for first-home buyers.

“The time it takes a typical household to save a home deposit remains higher than it was before the pandemic, continuing the decades-long upward trend.”

The cost of ‘timing the market’

Based in Berwick, a growth corridor on Melbourne’s outer southeast, Mortgage Choice broker David Thurmond says many of his clients are first-home buyers.

First-home buyers are being squeezed out of the market as higher interest rates weigh on borrowing capacity. Picture: Getty

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Uncertainty in the market last year caused many buyers to sit on the sidelines, a move Mr Thurmond says may now cost them a chance to purchase a home in the area.

“There was a lot of doom and gloom predictions in the news last year about property values, and so all the first homebuyers that I speak to, and even upgraders that I speak to, were expecting the market to drop 25% to 30%,” he said.

“Now that everyone has seen that the market hasn't fallen, they come in to enquire about their capacity to borrow and a lot of people are shocked at how much less their capacity is this year versus last year."

As an example, he says last year a client earning $60,000 a year would likely have qualified for a $500,000 or $600,000 property purchase.

“Now that same client needs to earn $100,000, $110,000, to afford that house on their own,” he said.

“So they're having to re-evaluate the purchase price, and potentially push themselves either further out or reduce the size and the quality of the home.”

Rising interest rates have shaved around 30% of a typical buyer's borrowing capacity. Picture: Getty

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Without government initiatives like the Home Guarantee Scheme, which allows buyers to purchase a home with a smaller deposit while avoiding costly Lenders Mortgage Insurance, he says very few first-home buyers in his area would be entering the market.

And while economists are predicting interest rates may have reached their peak, Mr Thurmond says borrowing capacity is not going to get better any time soon.

“Until interest rates drop, we're not going to see much of a change in borrowing capacity," he said.

“I would suggest speaking to your broker well before you're ready to purchase, even if you're 12 months, 24 months away, speak to someone, find out what steps you need to have in place and get a game plan.”

Originally published at: https://www.realestate.com.au/news/housing-affordability-reaches-three-decade-low/