Mortgages ‘not expensive relative to rent’, finds bank

Deutsche Bank’s Australian Housing Update has found that Australians are now paying 13.5 per cent of their household income on rent, up from the historical average of 12.8 per cent.

However, the bank also found that mortgage repayments (as a percentage of household income) remain in line with the historical average of around 17 per cent, which the bank argues “implies a continued move toward home ownership”.

Moreover, despite claims that many are facing “mortgage stress”, the bank argues that housing affordability has actually improved, even in the face of rising house prices. It states that this is largely due to interest costs.

The report reads: “Australian annualised median house prices to September 2016 have increased +0.6 per cent qoq [quarter-on-quarter] and +4 per cent yoy [year-on-year] on a weighted average basis, compared to an average qoq price growth of 1.5 per cent per quarter since QD12 [December quarter 2012].

“We note that annualised median house prices have increased in all major state capital cities (except in Perth, -3.6 per cent yoy) on a yoy basis in September 2016 (highest of 6.3 per cent yoy and 4.4 per cent yoy in Sydney and Melbourne respectively in QS16)…

“Home loan affordability (which is the ratio of median family income to average loan repayments; an increasing value reflects improving affordability of housing loans) increased +7.3 per cent yoy in QS16 [the September quarter 2016], and is in line compared with the historical average.

“Home loan affordability [as calculated by the REIA] has improved in all the states on a yoy-basis in QS16 (+7 per cent yoy in NSW and +10 per cent yoy in VIC)…

“We believe interest cost as a percentage of median household income is the key driver for affordability.”

Analysis run down

The bank’s analysis took the current house price and standard variable mortgage rate to calculate the weekly interest cost on a state basis. It then took average weekly income on a state basis to calculate the percentage of household income used to repay mortgage interest.

It found that in Sydney, the average weekly mortgage interest payment/average weekly income increased from a recent low of 50 per cent in the July quarter of 2013 to 63.6 per cent in QS16.

The bank argues that while this is “higher than the historical average of 57 per cent” — indicating it is “increasingly becoming difficult to afford to pay mortgage interests” — Sydney’s home loan affordability (as calculated by Deutsche Bank by looking at average weekly mortgage interest payment/average weekly income) improved. The bank found that the proportion dropped from 67.5 per cent in the March quarter of 2016 to 65.6 per cent in July and then 63.6 per cent in the September quarter.

Median rents to September 2016 increased by 2 per cent year-on-year (yoy) in Sydney to $470 per week, while median house prices rose by the same amount.

Likewise, in Melbourne, while the average weekly mortgage interest payment/average weekly income was higher than the historical average of 43.7 per cent (at 45.8 per cent) in the September quarter, the affordability improved to 45.8 per cent (down from 48.7 per cent in March).

Median house rents in Melbourne increased by 4.2 per cent in QS16 at $375 a week, while house prices increased by 2.9 per cent (yoy).

In Brisbane, the average weekly mortgage interest payment/average weekly income declined to 31.3 per cent in QS16 – down from the peak of 48.2 per cent in December 2010 and below the historical average of 35.6 per cent. Rents here increased by 1.3 per cent yoy but house prices rose by 4 per cent over the equivalent period

Perth also saw average weekly mortgage interest payment/average weekly income decrease, from 33.6 per cent in the September quarter 2014 to 27.3 per cent in QS16. This reflected a decline from the recent peak of 45.8 per cent in 2010 and was below the historical average of 33.5 per cent. Overall, Perth saw house prices drop by 3.9 per cent (to $512,000) and rents fell 9.5 per cent (to $380 a week).

“We note that mortgage payments as a percentage of income are in line with the historical average of 17 per cent, while rent payments remain above the historical average of 12.8 per cent,” the researchers said.

“We believe this implies a continued move towards home ownership.”

Cash rate could drop to 1.25 per cent

The bank went on to predict that it expects the Reserve Bank of Australia will reduce the cash rate later this year.

Deutsche Bank’s report stated: “We retain the view which we have held since the May 2016 RBA board meeting that the bank will reduce the cash rate as we expect inflation to eventually undershoot the RBA’s current published forecasts. 

“We expect a 1.25 per cent cash rate by mid-2017.”

[Related: House price growth slowest in 3 years]