The Housing Industry Association (HIA) today released its quarterly housing affordability index for the December quarter of 2013, which registered a slight fall. From the Media Release:
Housing affordability declined slightly in the December 2013 quarter as the positive impact from previous interest rate cuts tapered off..
“Those in the housing market or who have been on its cusp of and then entered in recent years have experienced a considerable improvement in affordability. This improvement has been driven by an easing interest rate cycle which now sees borrowing costs at or near record lows,” commented HIA Chief Economist, Harley Dale.
“The HIA-Commonwealth Bank Housing Affordability Index eased by 0.5 per cent in the December 2013 quarter as the impact from the last rate cut in August 2013 largely washed through the system,” noted Harley Dale. “The Index was nevertheless still at a level 8.4 per cent higher than what was observed in the December 2012 quarter.”
“In 2014 we are likely to see further gains in residential property prices, but in an environment of subdued household earnings growth and steady interest rates,” said Harley Dale. “The strong cyclical improvement to affordability for existing participants in the home ownership market has therefore run its course.”
“Addressing the large supply-side impediments to a structural improvement in affordability for all Australians is one of the nation’s most prominent policy challenges,” added Harley Dale. “Addressing this challenge requires focus from all levels of government and would provide considerable benefit to the Australian economy.”
The below chart plots the time series since 1994. As you can see, housing affordability is just off 11-year highs, according to the HIA:
Regular readers will know that I have concerns about this index.
First, housing affordability (i.e. the cost of the home relative to incomes) and mortgage serviceability (the immediate cost of servicing the loan) are not the same thing. The former remains near all-time lows, whereas the latter has improved significantly thanks to the reduction in interest rates, which are unlikely to always remain so low. In this regard, the HIA’s index should really be labelled a “mortgage affordability index”, since it measures the current cost of obtaining a mortgage on a median priced home, not the structural cost of housing per se.
Homes are currently only “affordable” if one assumes that current low mortgage rates are permanent. But given most mortgages now are for 25 to 30-year terms, it is fair to assume that repayments won’t always be so low.
Second, the dwelling price inputs into the HIA’s index also seems dodgy. As shown below, the median dwelling price of 470,400 as at December is said to have increased by only 1.8% over the year and actually fallen by 1.1% since December 2011:
Now compare this result to the ABS’ house (unit) price index, which recorded 9.5% (7.9%) growth over the year, and 12.3% (13.2%) growth since December 2011. Something does not add up!
For what it’s worth, below is my own mortgage affordability index, calculated on an annual basis, with median house prices derived from Abelson & Chung (2004) and APM, variable mortgage rates from the RBA, and household income measured as 1.5 times average pre-tax weekly earnings. As you can see, mortgage affordability has certainly improved in recent times, although it remains below the long-term average.