Despite a seemingly constant flow of negative news regarding the state of Australia’s housing and residential construction market, one set of numbers stands out as offering some form of cause for hope: housing affordability.
In the three months to March, the HIA Commonwealth Bank Housing Affordability Index improved by 3.7 points, or 6.4 per cent to come in at just under 65.0.
At this level, overall housing affordability in Australia is up 11 per cent when compared with the same quarter last year.
HIA Senior Economist Andrew Harvey says the latest figures are encouraging.
“In the March quarter we observed a modest increase in earnings, a modest decline in lending rates and a softening in the median dwelling price, so all factors moved in a direction which improved housing affordability,” Harvey says. “Cuts to the RBA cash rate totalling 50 basis points in late 2011 should have provided a much larger boost to affordability in the quarter, but the impact was eroded as lenders widened the margin between mortgage rates and the cash rate. After accounting for the wider margins, the average mortgage rate during the March quarter was only 13 basis points lower than in the December quarter.”
Harvey says those trying to gain a foothold into the housing market will welcome the recent improvement, adding that further affordability gains are expected in coming quarters as the effect of the May rate cut flows through.
However, he cautions against reading too much into the figures given that some of the recent improvement in affordability is driven by a softening in both the economy and house prices. Furthermore, many of the structural issues which feed through to a higher cost of housing than would otherwise be the case still need to be addressed, he says.
In terms of cities, Melbourne and Adelaide, each of which recorded gains of 7.3 per cent, led the charge, followed by Canberra (up 7.1 per cent), Brisbane (up 6.3 per cent) and Hobart (up three per cent). Perth and Sydney recorded affordability declines of 1.8 per cent and one per cent, respectively.
Outside of capital cities, affordability in non-metropolitan Western Australia was up 8.7 per cent, followed by South Australia (6.4 per cent), Queensland (4.5 per cent) New South Wales (2.4 per cent) and Tasmania (0.4 per cent). Affordability in non-metropolitan Victoria was unchanged over the period.
As the name implies, the affordability index – a measure which is influenced by house prices, interest rates, monthly mortgage payments and household earnings – is a measure of the burden of the cost of housing on average Australian families and their capacity to meet their housing finance obligations. All other things being equal, higher levels of housing affordability would be a positive sign for house prices and residential construction going forward as it implies greater capacity of Australians to take on more financial commitments.