ANZ in conjunction with CoreLogic have released a new housing affordability report, which shows that Australian housing affordability remains stretched despite the recent decline in dwelling values:
VALUE TO INCOME RATIO
In December 2018, the dwelling price to income ratio across the combined capital cities was recorded at 7.0 times, the lowest reading since June 2016. The improved affordability position is the result of lower housing values against a subtle rise in household incomes. For houses the ratio was 7.5 times, down from 7.7 times the previous quarter and 8.1 times the previous year. For units, the ratio was recorded at 6.2 times which is down from 6.4 times the previous quarter and 6.6 times the previous year.
YEARS TO SAVE A DEPOSIT
To save a 20% deposit, based on households saving 15% of their gross income, capital city households will typically be required to save for 9.4 years. With detached housing more expensive, households would take 9.9 years to save for a house and for a unit it takes 8.3 years on average. Five years ago it took 9.2 years to save a house deposit and 8.2 years for a unit deposit and a decade ago it took 8.8 years and 7.4 years respectively.
SHARE OF INCOME REQUIRED FOR REPAYMENTS
Repaying a new 80% LVR mortgage takes, on average, 38.0% of a household’s gross annual income. For the median household to service a new mortgage on a house would require an average of 40.4% of household income in December 2018, while repaying a new mortgage on a unit required 33.6% of income. The peak in the share of income required for repayments was March 2008 when it required 56.6% of income to repay a mortgage on a house and at the same time it required 47.1% of household income to service a mortgage on a unit.
RENT TO INCOME RATIO
Renting remains much cheaper than taking out a mortgage, with capital city households dedicating, on average, 27.5% of their annual income towards paying the landlord. Weekly rents have increased at a slower rate than household incomes over the past year which has resulted in the capital city metric falling over the past year to reach its lowest level since September 2007. Renting a capital city house now requires an average of 27.8% of household income and renting a unit requires 27.1%.
Because affordability is so stretched, and income growth remains anaemic, CoreLogic only anticipates that dwelling values will “rise slowly” next year:
CoreLogic’s Head of Research for Australia, Cameron Kusher, said: “The recent drop in property values follows a long period where prices increased at a much faster pace than household incomes.”
“We predict that price falls will settle later this year, followed by modest price growth starting from 2020,” Mr Kusher said.
In agree. House prices will most likely bottom in the second half and then rise moderately in 2020 as the cash rate falls to the equivalent of Australia’s zero bound and further policy stimulus arrives (i.e. on top of APRA’s relaxing of the interest rate buffer and small bank mortgage capital requirements, as well as first-home buyer deposit subsidies).
Any upswing, however, will be muted and constrained by sluggish wage growth, higher unemployment, and ongoing credit constraints brought about by more stringent borrower expense measurement after the abolition of the Household Expenditure Measure (HEM).