Housing affordability showing ‘subtle improvements’

CoreLogic’s latest housing affordability report has shown that housing “affordability” (based on the ratio of household incomes to dwelling prices) has reduced nationally from its record high of 6.84 in the March quarter of 2018 to 6.81 in the quarter ending June 2018.

According to its analysis, the typical Australian household is now around 6.8 times more than the gross annual income.

CoreLogic’s head of research, Tim Lawless, suggested that the improvement in affordability can be attributed to a rise in household incomes, which were up by 0.3 of a percentage point between the March and June quarter, while dwelling prices slipped by 0.2 of a percentage point lower over the quarter (based on the change in median selling price).

Mr Lawless said: “While the national view on housing affordability is important from a macro perspective, there is an extreme range of housing affordability across the country. Some regional areas, particularly those associated with the mining sector where incomes tend to be high and housing prices have slumped substantially since the end of the mining boom, housing affordability is generally very healthy.”

He noted, for example, that in the Western Australian town of Leonora (about 240km north of Kalgoorlie), the median dwelling price is just $45,000 and the median household income is just over $57,000 per annum providing for a ratio of just 0.69.

Meanwhile, at the other extreme, some of the areas around Sydney (Rose Bay, Vaucluse, Watsons Bay and Castle Hill East) show a dwelling price to income ratio upwards of 20.

Indeed, across Sydney, where the overall dwelling price to income ratio is 9.1, every region of the city shows a ratio higher than 6.1 and almost half (49 per cent) of the areas show a ratio higher than 10.

Areas where housing costs are relatively low such as the Outer West and Central Coast generally show a lower income profile, which keeps the dwelling price to income ratio elevated even though housing prices are typically viewed as more affordable in these areas.

“The widespread affordability challenges across Sydney highlight that fixing the affordability issue isn’t as simple as building more roads and highways in order to free up access to lower-priced markets; even the areas located a long way from the city centre and key working nodes, with inefficient transport connections, are woefully unaffordable in Sydney,” Mr Lawless said.

“With a federal election around the corner, no doubt we will see a lot more discussion around housing; after all, housing comprises almost 55 per cent of household wealth across the country and seems to always be a popular topic among voters.

“Let’s hope the debate and policy announcements extend further than the topics of negative gearing and capital gains tax concessions and we see the federal government doing a lot more to work with state and local governments on housing affordability solutions.”

Housing affordability and mortgage stress

Speaking to Mortgage Business, Mr Lawless noted that while there is generally an accepted definition of housing affordability (i.e. the ratio of income to dwelling prices), there is less certainty around what actually makes a house “affordable” to a home buyer.

He elaborated: “For housing affordability we would normally equate it to dwelling prices relative to household income. In Sydney, for example, dwelling prices are 9.1 times higher than the gross annual household income. So, in that context, you can see that housing affordability is challenging. However, housing affordability in the sense of servicing a mortgage is very different. We’ve seen ongoing improvements in serviceability as interest rates have come down over the past five or so years. In fact, it is easier to service a mortgage in markets like Sydney and Melbourne than it was 10 years ago when interest rates were about double what they are at the moment. 

“In that sense, you can understand why, when some people say there is no housing affordability issue in Australia, they are generally referring to more serviceability measures than housing affordability.” 

Likewise, Mr Lawless touched on the difficulty of defining “mortgage stress” (for example, a recent report from Gateway Bank suggested that 56 per cent of Australians were experiencing “mortgage stress”, claiming that their home loan “limits their lifestyle”). 

He told Mortgage Business: “I would typically classify it as someone who has fallen behind in their repayments. The best source of indicating mortgage stress, I believe, is looking at the 90-day+ arrears rate that the RBA publishes. That is currently tracking around 0.6-0.7 [of a percentage point] of the overall mortgage book, which is very low. It has moved up a little bit though. 

“But there are other definitions out there. For example, there is this old rule of thumb that a household shouldn’t be dedicating more than third of their income towards servicing their mortgage, for example. If you use that as a measure then most capital cities are either right on that benchmark or well beyond it. So, for example, even though in Sydney households are dedicating less of their incomes to service their mortgages than they were 10 years ago.”

Mr Lawless suggested that the ratio of the median dwelling price to what it would cost to service an 80 loan-to-value ratio mortgage (at the current variable mortgage rate) means that Sydneysiders are “still dedicating about 48 per cent of their incomes towards servicing their mortgages, whereas back in 2007, it was about 55 per cent”.

“So, it really depends on what benchmark you want to use, but if people still look at the old rule of thumb of not dedicating more than a third of your income towards servicing your mortgage debt, then I can see why people say that ‘mortgage stress’ is widespread,” the head of research said. 

[Related: Analyst warns of housing market ‘wild cards’]