Housing affordability in Australia is improving for the first time in ages

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  • Australian home prices are now falling across many parts of the country.
  • Accompanied by modest household income growth, that means housing affordability is improving based on many individual metrics, at least from a broad perspective.
  • It’s still far more affordable to rent rather than buy in Australia. Rental affordability hit its highest levels in over a decade.

For the first time in a long time, housing affordability in Australia is getting better. And not just on one metric, but many.

However, even with the recent improvement, affordability constraints still remain acute in many of Australia’s largest housing markets.

According to CoreLogic’s Housing Affordability Report, after hitting the highest level on record earlier this year, the ratio of home prices to household incomes started to decline in the June quarter.

“National results indicate that as at June 2018 the price to income ratio was measured at 6.81, a modest reduction from the March 2018 quarter when the national dwelling price to income ratio reached a record high of 6.84,” said Tim Lawless, Head of Research at CoreLogic.

“Across the broad dwelling types, the ratio of house prices to household incomes was recorded at 7.1 times, down slightly from the March quarter, while the unit price to household income ratio was recorded at 6.2, which was well down from its 6.6 times peak in late 2015 through to early 2016.”

CoreLogic

The figures presented by CoreLogic are calculated based on median household incomes compared to median home prices, both for houses and apartments as well as specific markets.

The incomes data was sourced from ANU’s Centre for Social Research and Methods.

CoreLogic found the median dwelling price to income ratio in Australia’s capital cities was higher than the national average, standing at 7.2 times in the June quarter, the lowest level since the first quarter of 2017.

The multiple to buy a house fell to 7.8 times income last quarter, down from the record high of 7.9 in the March quarter of this year, while the multiple for a capital city apartment also fell to 6.4, below the peak of 6.5 set in 2015.

For regional areas, the multiple for houses stood at 6.2 times income last quarter, and 5.8 times for units. Both were below the record levels set back in 2008.

However, those national, capital city and regional numbers are clearly not reflective of affordability levels in individual markets, particularly in Sydney and Melbourne, Australia’s largest and most expensive housing markets.

While the multiple fell in both cities during the June quarter, at 9.1 and 8.1 times median income respectively, both remain well above the national average, and significantly higher than levels seen earlier in the decade.

Over the past 10 years, Sydney’s median home price has increased by 89%, more than double the 42% increase in the city’s median household income. The gap between the two was even larger over the past five years, with prices lifting by 51%, nearly triple the increase in incomes.

The story has been similar in Melbourne with prices up 77.3% over the past decade and 41.5% in the past five years, well above the 34.7% and 12.4% lift in incomes respectively over those time periods.

Across the remainder of the country, Darwin, at four times median income, was the most affordable capital city in the June quarter based on this metric. At 6.4 times income, the multiple in Adelaide was the third highest of the capital cities behind Sydney and Melbourne.

Along with the national median home price to income ratio, CoreLogic found the length of time to save for a 20% housing deposit — something that has increased in importance recently given lending standards are being strengthened when it comes to high loan to income borrowers — also improved modestly last quarter.

“Those saving hard for a 20% deposit may take solace in the fact that the national average is now 9.1 years for the typical household,” Lawless said.

“Detached houses are generally more expensive, so take longer — 9.4 years versus 8.3 years for a unit.”

However, as seen in the chart below, the length of time to save for a house or apartment in Australia is still significantly longer than earlier this decade.

CoreLogic

“Five years ago, it took just 8.5 years to save a 20% house deposit and 8.3 years for a unit. A decade ago it took 8.8 years and 8.2 years respectively,” Lawless said.

The calculations used by CoreLogic are based on a household saving 15% of their gross annual income. This measure of affordability could be deemed to be housing market accessibility for new buyers given tighter lending restrictions that have been introduced in recent years.

Like those metrics, CoreLogic found the share of household income required to meet mortgage repayments — a metric often used to gauge affordability levels once a property has been purchased — also improved modestly last quarter, continuing the trend that’s been seen since the GFC as official and mortgage interest rates have been reduced, helping to offset higher levels of indebtedness.

CoreLogic

“In June 2018, the repayment on an 80% LVR mortgage required 36.3% of gross household income, a substantially lower share compared with ten years ago when households were dedicating an average of 51.0% of their gross income towards paying the mortgage,” Lawless said.

“This servicing reduction is partly because discounted variable mortgage rates have almost halved over the past ten years from 8.85% in June 2008 to 4.50% in June 2018.”

Nationwide, it took 37.6% of gross household income to service an 80% LVR mortgage on a median-valued house in the June quarter. For apartments, it stood at 26.9%.

Despite the improvement in the affordability metrics last quarter, Lawless said it’s still significantly more affordable to rent, rather than buy, a home at present.

CoreLogic

“It’s still cheaper to rent than repay a mortgage, with both house and unit rents currently costing 26.9% of gross household income,” he said.

“In fact, stronger income growth relative to rents has pushed the national ‘rent to income ratio’ to its lowest level since September 2007.”

Lawless says the decline in the rent to household income ratio can be attributed to the low rate of rental price appreciation, noting that national weekly rents have risen only 2.9% per annum over the past ten years, slower than the 3.1% per annum average increase in household incomes over the same period.

This excellent table from CoreLogic looks at all of the affordability metrics across individual markets as at the end of June. Even on a smaller scale, this is only a broad indication of affordability levels across the country, and not reflective of what’s seen in individual suburbs and towns, or for every family living in those locations.

CoreLogic

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