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CBA: Housing affordability looks set to worsen

Photo: Cameron Spencer/Getty Images

Australian capital city house prices enjoyed a storming 2016, increasing by the largest level since 2009, according to figures released by CoreLogic earlier this month.

Thanks largely to enormous gains of 15.5% and 13.7% in Sydney and Melbourne, the largest and most expensive housing markets in the country, prices across the nation’s eight capitals rocketed higher by 10.9% in weighted terms over the year.

Two interest rate cuts from the RBA, delivered in May and August, along with an acceleration in investor lending and limited stock on the market, proved to be a powerful concoction for prices.

The question many are now asking, particularly after such a strong and prolonged period of house price growth, is what will happen next?Will price growth stall, or even decline, or will they continue to soar, maintaining the theme seen in recent years in Australia’s southeastern capitals?

To Michael Workman, senior economist at the Commonwealth Bank, while the rapid house price growth of 2016 is unlikely to be repeated, they’re still likely to grow at a solid clip, led by the usual suspects – Sydney and Melbourne.

“We believe the headwinds for housing prices will strengthen through 2017,” he says, noting increased housing supply and weaker demand should keep a lid on price growth in the year ahead.

“On the supply side, there is record new construction underway. It will deliver significant new stock to property markets, mainly in the largest cities, Melbourne, Brisbane and Sydney, which have recorded the highest price gains.

“Record new apartment supply in the three largest cities, and their suburbs, should restrain growth in prices and rents through 2017,” he says.

On the other side of the equation, Workman says that interest rates, household income and population will also keep demand in check.

“With no interest rate cuts likely, we believe that modest household income growth, via weak wages growth, will limit demand pressures. Some demand conditions, like firm population and jobs growth will remain positive for housing demand, but not as positive as previously,” he says.

So quite a few headwinds on both sides, although, as seen in the CBA’s forecasts below, it still expects capital city house prices to rise by a further 5% in 2017, led by gains in Sydney and Melbourne.

Source: CBA

This, says Workman, will worsen housing affordability, laying the platform for an even fiercer debate than the one currently being observed.

“The amount required as a proportion of annual average household disposable income for a 20% deposit on a dwelling purchase continues to move well beyond the reach of most households,” he says.

As this chart from the CBA shows, the amount for a 20% housing deposit in Australia — having hovered around 100% of a household’s average annual disposable income from 2003 to 2008 — has jackknifed in recent years, courtesy of house prices rising far quicker than income levels.

“So affordability, from a deposit view point, is likely to worsen, not improve as housing prices rise,” says Workman.

Source: CBA

He also says that housing investors — blamed by some for exacerbating affordability for prospective first-time buyers — will continue to be a significant influence on housing prices “until federal tax laws favouring leveraged housing investment are reformed”.

“The federal government controls some of the significant demand factors for housing markets. Namely, population growth via migration and the spectrum of tax and foreign investment policies that significantly inflate demand for existing and new housing,” he says.

“Housing affordability can be improved via stabilising growth in house prices and rents, and by gradual reforms to both supply and demand issues.”

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