Property affordability June 2021 update

Australian property market prices continued to climb over the last month, with the past six months seeing some of the strongest growth on record. Mortgage interest rates edged higher as the Reserve Bank of Australia ended its Term Funding Facility. There are some extraordinary divergences in affordability. It has never been cheaper in some markets to service a mortgage, but never more expensive to save for a deposit or pay off the loan.

In general, housing valuation and affordability statistics worsened over June. For investors, rental yields have never been lower in an absolute sense, never higher relative to mortgage rates.

The net effect is that the Federal Government and Reserve Bank have successfully distorted conditions to encourage as many people as possible to borrow as much as possible. An investment in housing is basically a vote of confidence in their ability to keep force-feeding the market.

We run an Australian property market calculator to help investors or potential homeowners determine the returns on Australian property. The idea we want to illustrate is that there are a number of key inputs into housing valuation. Interest rates are the most important, but the other limiting factors are:

  1. Mortgage Payments to Rent: comparing the cost of a mortgage with the cost of renting the same house. Using this ratio to constrain house prices, we assume that people will prefer to rent when the ratio gets high rather than buy.
  2. Mortgage Payments to Wages: assuming when the ratio gets high, people rent because they cannot afford to buy. 
  3. Property Prices to Wages: assuming when the ratio gets high, people rent because they cannot save enough money to afford a deposit. We treat this as less important than the above two ratios.
  4. Rental Yield: Rental yield is the annual rent divided by the property price. By using this ratio to forecast prices, you are assuming when the ratio gets low investors will not buy property as they are not getting a return that is high enough.
Property valuation statistics June 2021
Housing valuation statistics June 2021 Real Estate valuation statistics June 2021

Australian mortgage rates can go lower but look like rising first.

This is the confusing part. There are effectively two different interest rates at the moment, the floating rate and the three-year fixed rate.

  • The floating rate is determined mainly based on the Reserve Bank of Australia. It reduced the floating rate to 0.1% in March 2020, which reduced the standard variable rate from banks to around 4.5%. This is unlikely to change. 
  • In March 2020, the Reserve Bank also introduced a facility where they lent directly to the banks at 0.1% for three years. This facility (and other market interventions) allowed banks to drop three-year fixed mortgages to around 2%.  Its name is the Term Funding Facility. It ended at the end of June.

We note the European Central Bank introduced the same mechanism in 2014 and has never been able to remove it. It started with 0.1% funding for banks in 2014. By 2016 the rate was -0.4%. Now, -1.0%. Yes, the central bank will pay commercial banks up to 1% if they can just find someone (anyone!!!) to borrow the money.

When you adjust the factors in our property market calculator, you find that with low inflation, wage growth and rent growth that interest rates become even more important for determining property prices. But forget about the cash rate. The important factor is the Term Funding Facility.  At the moment, the Reserve Bank is planning on removing this facility in June. Interest rates have already risen slightly, and it seems likely the removal will likely see the three-year rate continue to rise.   

Macro factors

property macro factors


What does this do to residential property valuations?

Keep in mind that I’m talking about forecasting residential property in aggregate – not individual houses or suburbs. 

There are significant links between property prices and the availability of debt. The financial crisis showed this internationally. The Royal Commission into banking showed this in Australia. When the amount of debt available rises, so do property values. When debt slows down, property values fall. 

Credit growth is at extremely high levels. Credit availability is not a problem. 

At one end of the spectrum is Sydney houses. They are now looking expensive on affordability measures:

Sydney House affordability 


At the other end of the spectrum is Brisbane units, still looking more affordable than any other major city:

Brisbane Unit affordability

For the above charts for other Australian locations see the property detail update. For more on how and why we use these ratios see our residential real estate forecasting methodology.

Australian Property Market Outlook

It is a fascinating showdown.

On the one hand, plummeting immigration, pandemic disruptions and the end of eviction/mortgage payment moratoriums aren’t helping. A boost in supply is in progress, spurred by new home building. Rental growth is showing vague signs of life, but is close to as weak as it has ever been. And Australia starts with a larger private debt burden than just about any other country.

On the other, we have a burning political desire to keep Australian property market prices high and pump more debt into the economy. Inflation is low, as is wage growth, meaning interest rates can stay lower for longer. We have a roadmap to much lower interest rates to help. There is a structurally higher demand for houses vs units due to the fear of more lockdowns.

Australia is stuck in a debt trap. We’ve got so much debt we can’t raise rates because it makes it more difficult for people to pay back debt. To get more growth we have to cut rates, so people borrow more and the cycle goes on.

The best hope for change? Mass New Deal-style work schemes push up earnings and growth comes from real spending power instead of debt. But that is a long way away.

In the meantime, there are other ways to keep the property party going. Once mortgages were for 20 years, then 25, now 30. Soon it will be 50. Japan has 100 year mortgages. Many people will never pay their mortgage back, so owning a home might become like renting – just that it’s renting from the bank.


Nucleus Wealth has compiled this data using a range of different sources.

We use Domain for more recent data quarterly property prices and rents, cross-checked with SQM to fill any short-term moves. Older information is from Rismark  and the Australian Bureau of Statistics to fill time series.

For economic data, we use either Reserve Bank of Australia or Australia Bureau of Statistics data. For older data, we have had to estimate some factors due to differing definitions over time.



Damien Klassen is Head of Investments at the Macrobusiness Fund, which is powered by Nucleus Wealth.

Follow @DamienKlassen on Twitter or Linked In

The information on this blog contains general information and does not take into account your personal objectives, financial situation or needs. Past performance is not an indication of future performance. Damien Klassen is an authorised representative of Nucleus Wealth Management, a Corporate Authorised Representative of Nucleus Advice Pty Ltd – AFSL 515796.

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  1. I don’t know what is going on – but there are stock on the market and prices in Northcote, Fairfield, Alphington, Ivanhoe, Preston, Heidelberg etc is going absolutely ballistic – crazy.

    But looking through Northcote say – absolutely noting is selling – and prices are ALL WITHELD.

    There are maybe 4 in the last month, maybe 6 in the last 8 weeks – but there are triple that added every week.

    Looked at some seriously nice units – 2-3 bedroom $650k and they were offering $100k cash back !!!

    Crazy pills.

    • Councils & State Government should contribute absolute minimum (maybe just facilitate the works) otherwise when does it ever end.

  2. Here’s a problem which perplexes me
    Simply put, if the only measurable product of our society is the new houses, is it fair to consider our Productivity as being total number of houses divided by total working population * hours worked?
    Isn’t that the definition of Productivity for any manufacturing entity Total widgets / total man hours
    So if this is the correct way to measure “Productivity” what does it tell us about the net productivity of Sidneysiders?
    What does it tell us about the true value of the product that we collectively produce? (surely it suggests that the real cost of a Sydney house is best approximated by :Total number of new houses per year / Total annual Sydney man hours of labour. And what would that number be? If you paly around with these numbers you’ll come up with an average per house price somewhere north of $2M.

    I’ve been playing around with this idea for a while now the only firm conclusion is that our House costs should be astronomical if our Productivity is low and dirt cheap if our Productivity is high ….hmmm, but that should hardly come as news for any modern Economists
    What was it that the Treasury used to consider to be their most important metrics
    Productivity, Participation and Population
    Personally I think we need to start admitting to ourselves that low labour Productivity is a major factor in our astronomical House prices, but I’d rather hear what you guys think….

  3. “Soon it will be 50. Japan has 100 year mortgages.”

    Which way did Japan’s property prices head?

  4. It 5 years time you’ll be kicking yourself for not buying 5 years earlier when you thought it was “too expensive and due for a crash”.

    And in the meantime you’re still stuck in the rent trap, spending $25k+ per year on rent which is just dead money that could have gone towards your mortgage while building equity.

  5. Hello bcn? Where’s the crash you said was coming? You always seem to disappear from these record growth posts… Let me guess… wait for another 18 months and see?? lol Bears have got it so wrong again and will be sitting on the sidelines for another decade shouting angrily that the housing crash is just around the corner!