Mythbusting: is Australian housing unaffordable?

Australia’s capital city housing markets remain robust, resilient and reliable. This is good news for home owners, investors and tenants – and for governments, the economy and, naturally, the community at large.

But shallow measures of performance can undermine confidence in their underlying health.

An example of this is the repeated assertion that Australian housing is “unaffordable”. Typically, this view relies on measures that compare income levels with house prices.

The International Monetary Fund’s (IMF) recent international House Price-to-Income Ratio series placed Australia as the third most unaffordable country in the world, behind Belgium and Canada.

“House prices continue to be out of reach of household incomes in many countries,” the report says.

Improvements in affordability

But the surge in housing-market activity and price rises over the past two years reflects a significant improvement in affordability. This is mostly due to a sharp fall in official interest rates, 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 lower mortgage-lending rates, the strong desire of Australians to own a home and our confidence in residential investment, pent-up demand has been released. And naturally this has been underscored by the solid performance of the Australian economy – with relatively low unemployment, steadily rising incomes and jobs growth.

Average monthly mortgage repayments have fallen with interest rates. Using Australian Bureau of Statistics home-loan data, Reserve Bank indicator rates and a typical variable loan structure, the average weekly Australian loan repayment has fallen from a peak of $546 recorded over the June quarter of 2011 to $450 a week over the September quarter of 2013.

The average weekly home-loan repayment has increased slightly to $467 a week over the March quarter of 2014, but this isn’t surprising given house price growth, which leads to bigger loans.

The improvement in affordability has led to prices rising. The Australian median house price has increased from its previous trough point of $533,738 over the December quarter of 2011 to $614,026 over the March quarter of 2014.

Increase in prices

A 15 per cent fall in average loan repayments since 2011 has, therefore, translated into a 15 per cent increase in house prices – an uncanny coincidence? Or reinforcement of the underlying stability of Australia’s housing markets?

Affordability is really about our capacity to pay our mortgage. The proportion of the median Australian weekly disposable income required for the average mortgage has fallen from a peak of 35.6 per cent in the June quarter of 2011 to a low of 26.9 per cent over the September quarter of 2013. The March quarter measure of 27.5 per cent remains well below the seven-year average of 32 per cent.

Historically low interest rates combined with rising incomes have improved housing affordability and tapped into strong underlying demand. This has led to the strongest house-price growth since the last affordability peak in 2009-10.

A robust economy, strong desire for home ownership and investment, and the supply and demand mechanics add up to strong and sustainable price growth in the capital city housing markets.