Housing affordability improves slightly as prices fall

18 views 2022-09-02 13:46:54

The rapid drop in house prices has slashed around five months off the time needed to save a deposit across Sydney and six months in Melbourne, as early signs of improving affordability emerge, the ANZ housing affordability report shows.

While the time saving is a small improvement relative to the 17.1 years still needed to save a deposit in Sydney and 13.6 years in Melbourne, the deposit hurdle is likely to fall further as prices continue to drop and wages start to rise.

“We’re seeing the first signs of housing affordability in some metrics, but these are marginal compared to the deterioration that we saw through the pandemic,” said ANZ senior economist Felicity Emmett.

“But as interest rates rise, home value declines are expected to become larger, and more widespread. Additionally, tight labour market conditions and high inflationary expectations have also contributed to an uplift, albeit gradual, in wages growth.

“The combination of an increase in wages growth and an acceleration of the housing market downturn should see the years required to save a home loan deposit reduce in the coming quarters.”

The ratio of dwelling values and household income has also dropped slightly across the combined capitals, falling by 0.1 point to 9.4 over the June quarter.

But the share of household income required to service a mortgage has blown out to a record high amid rising interest rates.

The portion of annual household income required to service a new mortgage nationally increased to 44 per cent in June, up from 40.4 per cent in March.

Across the capital cities, mortgage serviceability deteriorated the most where property values continued to rise in the June quarter.

In Adelaide, the portion of income needed to service a mortgage jumped by 5.2 percentage points to 42.6 per cent, and it rose by 4.5 percentage points to 41.8 per cent in Brisbane.

During the same period, house prices rose by 5.1 per cent in Adelaide and by 2.7 per cent in Brisbane.

Even in Sydney and Melbourne, where property values declined by 2.8 per cent and by 1.8 per cent respectively in the June quarter, mortgage serviceability is still higher compared to the previous three months.

The share of income needed to service a home loan in Sydney had risen by 3.3 percentage points to 66.1 per cent. It lifted by 2.3 percentage points to 52.7 per cent in Melbourne and was up by 3 percentage points to 41.8 per cent in Canberra.

“There’s a bit of a perception that if house prices fall, then mortgage affordability will improve but actually, on our interest rate forecasts, prices would have to fall another more than 25 per cent for mortgage serviceability to improve, and we don’t think that prices will fall that far, certainly not a national level.

“So with higher interest rates, we are seeing a big increase in how much people have to pay to service their mortgage and that means on that measure, affordability will deteriorate.”

Eliza Owen, CoreLogic head of research said affordability in home ownership would be improved by a pretty substantial reduction of prices.

“It’s really not until you get to a 26 per cent decline in the median dwelling value that serviceability improves amid higher rates,” Ms Owen said.

“To get there, you either need to increase housing supply, reduce housing demand, or both.

“On the demand side at the moment it seems that investment demand for housing is on the decline, which isn’t too surprising given investment mortgage rates are generally inherently higher, so I think the increase in the cash rate is hitting this market a little harder at the moment.

“On the supply side there is a huge amount of work in the construction pipeline, but temporary constraints on the industry seem to be delaying completion, so enabling that pipeline of work through supply chain improvements, targeted training and migration to boost labour supply would be a big help.”

This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/housing-affordability-improves-slightly-as-prices-fall-20220829-p5bdom

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