Housing affordability now steady, but still worse than long-term average

Affordability concerns have eased the overall boom in house prices over the past months.

The worsening of housing affordability appears to have already hit a wall, ending the boom time for the property market.

A study by Bluestone Home Loan showed that the ability of Australian households to afford a home loan steadied in February, with the affordability index staying at 96.6.

This represents a significant pause in runaway affordability compared to the 2.2% increase at the start of 2022 and the three consecutive months of sharp declines in affordability.

However, the index continued to be above the long-term average reading of 87.1 over the nine consecutive rolling quarters — overall, affordability has already declined by 17%, the highest since 2010.

New South Wales and Victoria reported higher index readings than average, indicating worse conditions in the two states during the period.

Bluestone Home Loans consultant economist Dr Andrew Wilson said the strong home price growth over the past two years has resulted in buyers borrowing more to keep pace with the markets amid subdued incomes and flat interest rates

“The Australian property market has finally hit the wall in terms of affordability – without higher incomes or lower interest rates to drive prices higher, the house price boom is over,” he said.

“Wages growth remains stubbornly low and last week the Reserve Bank of Australia finally signaled the prospect of rising interest rates.”

Dr Wilson said the affordability index has been indicating for the last six months that runaway affordability was set to plateau.

“Disruptions from COVID lockdowns muddied the waters in late 2021 but with pent-up demand now largely satisfied, the dynamics of the housing market are now returning to normal,” he said.

“Fears of a housing market crash are completely overdone — the easing of COVID restrictions and concerns, a reviving national economy, the imminent return of mass migration and the significant stimulus policies introduced for first home buyers in the Budget will support solid home lending through 2022.”

Dr Wilson said the potential rate hikes following the likely announcement by the RBA to raise the cash rate should not be a cause of panic for many homeowners.

“Full employment, a near-record household savings rate and extremely high levels of home equity after the price boom of the last 18 months mean that few Australian households are likely to experience mortgage stress in the near future,” he said.

Resource: yourmortgage.com.au