Nationally housing affordability is growing due to Australian median home prices falling further and marginal growth in wages. This rise in affordability also coincides with the Reserve Bank of Australia’s latest decision to leave the official cash rate on hold at 1.5% for another month.
What’s the bottom line? Well, with the Australian housing market worth $7.3 trillion it makes up a sizeable portion of the Australian economy. Of this market, Sydney and Melbourne make up 60% of the market share. So, price fluctuations in these cities have a considerable impact on what happens across the market nationally, which, in turn, affects the Australian economy and consumer confidence. Consequently, these markets influence RBA rate settings, and the outlook for economic growth.
For instance, when the Sydney property market boomed, and the median home value hit $1 million in mid-2015 due to low interest rates and investors buying up housing stock, the Reserve Bank issued warnings over rising household debt concerns. Shortly after that, the Australian Prudential Regulation Authority (APRA), a government body that promotes financial stability, introduced regulatory changes to lending that restricted investor borrowing to prevent household debt becoming difficult to manage.
But, here’s the kicker: Regulatory changes led to the booming Australian property market slowing down. Investors, which made up over 55% of the market share in 2015 have now dropped to approximately 41%. Since peaking in 2017, Sydney home values have fallen by 5.6%. However, values in this city during the GFC fell by 7%, and by 7.1% during the 2003-2006 downturn.
So, how does this relate to housing affordability?
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Australian Housing Affordability
According to CoreLogic RP Data, the national housing affordability ratio, based on household income to dwelling prices, fell to 6.81 during the June quarter, from a high of 6.84 in the March quarter.
The rise in housing affordability links directly to a slight increase in household income, and the fact that home values are falling. CoreLogic report that household incomes in Australia rose by 0.3% between the March and June quarters, while home values over this time slipped 0.2% nationally based on median values.
It gets better though, according to data housing affordability fluctuates, as do home values, depending on location. For example, property in Leonora, Western Australia has a median value of $45,000, with the median household income reaching $57,000 per annum. Thus, this region’s housing affordability ratio is just 0.69, which means that it takes 0.69 times the national median wage to buy a home in this region. On the other hand, a home in Vaucluse, Sydney, has an affordability ratio of 20.
Given this information, what are the median values of Australian capitals at present?
Australian Housing Performance Over The Last Month
Still in a phase of correction the Australian housing market, according to CoreLogic RPData, has declined by a marginal 2.7% since it’s peak in September 2017. Nationally, dwelling values dropped by 0.5% since August 30th, with five of eight capital cities recording lower values. This data, says CoreLogic, is slower than previous declines such as the market downturn that occurred between Jun 2010 to Feb 2012 where dwelling values nationally fell by 3.0% in the first 12-months – from the height of the peak through to the bottom of the decline the market dropped by 6.5%.
Compared to peak values recorded in 2014, Darwin and Perth are the hardest hit cities recording 22.1% and 13.2% consecutively. The cities that are having the greatest impact on national dwelling values though are Sydney and Melbourne, which account for over half of the national market.
Adelaide, Canberra and Hobart are realising gains. However, these gains are substantially less than 12-months ago. Gains in Adelaide 12-months ago were around 5.0%, but these have slowed to 0.7%, Canberra gains have slowed from 7.8% to 2.0%, and Hobart’s gains were 14.3% but have declined to 9.3%.
|Dwelling Values September 31, 2018|
|City or Suburb||Month||Qtr.||Year||Total Return||Median Values|
Source: CoreLogic RPData
Want to know the best part? According to CoreLogic Data, the lower level of the markets – homes of lesser values – are performing better. This trend is due to a surge in first home buyer numbers and broader housing affordability constraints lifting.
The major contributor to the market slowdown is the tightening of lending regulation where client interests are a priority, along with reducing lending risk. As such, this approach has impacted on credit availability, with investor credit now reportedly growing at its slowest pace in 5-years.
Investors, however, still account for 41% of the Australian housing market despite higher mortgage rates, stricter lending criteria, and lower rental yields. Although, housing demand continues to grow along with the health of the Australian economy, and home loan rates are estimated to stay low until 2020.
If you are looking to beat a rate rise by securing a more competitive home loan, then it’s time to discuss your options with an eChoice mortgage broker. We have access to 100’s of products across a panel of multiple lenders, so we can help you find a competitive mortgage.