Despite media hype, affordability is "normal"

Posted on 1/03/2010  

Affordability has returned to “normal” levels after a short period of high affordability. Contrary to media reports of a “crisis”, the latest affordability index from the Commonwealth Bank reflects a return to the levels that prevailed from 2005 until late 2008.


Media has latched on to the Commonwealth Bank’s report and reported it as the end of the home ownership dream in Australia. When the emotion and sensationalism is removed from the equation, the situation is this:-


There was a decline in the affordability index in the December 2009 Quarter, following recent rises in prices and interest rates. The decline has come from a particularly favourable level, with affordability healthy from late 2008 to late 2009 (thanks mainly to the decline in interest rates from late 2008).


In 2009 we saw an uplift in activity at the lower end of the residential market thanks to softer prices and lower interest rates – which has combined to improve affordability.



Multiple interest rates cuts in particular led housing affordability conditions early in 2009 to their best levels in five years. The HIA-CBA First Home Buyer Affordability Index published in February 2009 revealed a 39% increase in the affordability measure in the December 2008 Quarter. The Index improved from 110 in the September 2008 Quarter to 153 in the December 2008 Quarter, the most affordable level since March 2003.

Since then, there has a reversal in the affordability situation, thanks to price growth since mid-2009, coupled with interest rate rises from the Reserve Bank.


The HIA-CBA Affordability Index for the December 2009 Quarter was 120, still better than the levels which existed through 2007 and the first three quarters of 2008.


Throughout 2005, 2006, 2007 and most of 2008, the Affordability Index hovered between 100 and 120. Affordability has now returned to what we might call “normal” levels.


One problem with affordability indexes is that they deal with median situations – and newspaper analysis overlooks that there are many locations in each major city that provide homes at prices well below median levels. I also question the Commonwealth Bank data which claims that the typical first-home buyer in Australia paid $486,000 in the December 2009 Quarter and needed an income of $120,000 to afford it.



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