Affordability improves as (average) prices fall and incomes rise

Posted on 27/08/2011  

Housing affordability is steadily improving thanks to rising incomes, a reduction in fixed interest rates and property prices which, on average, have dropped a little.

Even the HIA-Commonwealth Housing Affordability Index, which generally tries to construct a doomsday scenario based on dodgy data, is recording steady improvements in affordability.

Mortgage broker Mortgage Choice says first-home buyers are “dipping their toes back in the market”, with home loan approvals for first-timers rising to 35% of all loans in June, compared with the average of 27%.

Mortgage Choice chief executive Michael Russell suggests the upturn in activity has been prompted by softer house prices – which he says are going through “a mild correction” – and a drop in long-term interest rates.

(When Russell talks of a price correction, he is presumably speaking of the capital cities, because the key regional markets are rising strongly).

Interest rates on fixed-rate loans now average 6.39% for one-year and three-year loans, which is around 1.5 percentage points below the standard variable rates of most lenders.

The Housing Affordability Index improved 0.8% in the June Quarter and is now 7.2% better than the level of June 2010. This is despite the HIA and Commonwealth Bank somehow producing a rise in the median house price, which is contrary to every other price measure in the country.

A key factor in improving affordability, and one that is often overlooked, is the rise in average incomes. The latest figures from the Australian Bureau of Statistics show that private sector wages have grown 4.2% in the past year, while public sector wages are up almost 5%.

The rise in incomes is well ahead of the movement in house prices which, according to the ABS House Price Indexes, fell 1.9% in the year to June (weighted average across the eight capital cities).



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