Mortgage affordability hits lowest point since 2011: Bluestone

The higher the index number, the higher the proportion of average income required for the average home loan and the lower affordability is.

The index is tracking at its highest point since 2011, when housing markets had been hit by interest rate increases from mortgage providers.

It has also remained above the long-term average over 11 consecutive rolling quarters (almost three years), with the current annual affordability decline of 16.9 per cent being the highest recorded in the series.

Bluestone consultant economist Andrew Wilson commented that buyers had borrowed more to keep pace with markets as prices surged over 2021 and into 2022.

“Higher loan amounts, coupled with subdued wages growth, has resulted in a higher proportion of buyer incomes required for loan repayments,” Dr Wilson said.

“Strict lending conditions from financial institutions however place a ceiling on borrowing capacity that can sideline buyers and result in reduced demand and lower prices growth.”

All states had reported declines in home loan affordability over April, with the exception of the ACT, where the index had a marginal fall of 0.5 per cent.

However, Bluestone noted that historically, above-average affordability index levels have indicated the prospect of a slowdown in both house price growth and home loan activity.

As Dr Wilson explained, property price increases have stabilised across the Sydney and Melbourne markets, with “rising affordability barriers increasingly sidelining buyer capacity and activity”.

“All eyes will be on the winter selling season as, for the first time, home loan affordability data will reflect the increases in official interest rates in May and June – the first rises in over 11 years with more set to follow as the RBA [Reserve Bank of Australia] struggles to control high inflation,” Dr Wilson said.

The RBA has indicated the 25-bp and 50-bp hikes that took place over May and June are the first of more to come, as it grapples to get a grip on inflation.

As such, home loan affordability is set to keep sliding despite the deceleration in house price growth, Dr Wilson said, as mortgage holders will cop higher repayments.

However, the economist has issued a somewhat optimistic outlook for housing, expecting higher rates to be offset by record-low unemployment, rising wages, record-level savings, the wealth effect from the recent housing boom and the 3 percentage point serviceability buffer rate banks need to use, to test borrowers’ debt repayment abilities.

Dr Wilson also expects that supply will remain below demand.

“Despite predictions of a plunge in house prices driven by higher interest rates, housing demand is set to be bolstered by the return of mass migration, a surge in international students and new policies designed to assist first home buyers,” he stated.

“Housing markets are already clearly undersupplied as indicated by tight rental conditions with sharply rising rents and record low vacancy rates that are encouraging surging investor activity.”

State by state

NSW remained the clear leader in unaffordability, with its home loan affordability index reading rising by 1.7 per cent over the quarter and 20.7 per cent year-on-year.

Relative to the national result, the NSW index was 27.2 per cent higher over the April quarter. But its relative position had decreased from the March quarter.

Victoria’s result was 4.7 per cent higher than the national index, with the state creeping by 1.6 per cent over the quarter and 16.5 per cent year-on-year.

Tasmania had seen a greater yearly spurt in its index, up by 17.5 per cent from the same period in 202, while it managed the highest quarterly increase of 4.1 per cent.

However, the island state’s relative affordability index was 14.7 per cent lower than the national average – leaving it with a lower relative affordability position than the ACT and Queensland.

Over in the ACT, the index recorded a marginal slip, but it was up by 8.1 per cent year-on-year. Its affordability index was 9.3 per cent lower relative to the national level.

Queensland meanwhile saw its index climb by 3 per cent over the quarter, contributing to a 15.5 per cent year-on-year increase. Its relative affordability sat close to Tasmania, at 12.2 per cent lower than the national level.

South Australia on the other hand jumped by 16.4 per cent year-on-year, while its index was up by 2.9 per cent over the April quarter – leaving it with a relative affordability 16.2 per cent lower than the nationwide result.

Western Australia had also increased by 3.4 per cent over the quarter, while its index reading jumped by 9.2 per cent year-on-year. It had the lowest relative affordability of any state, at a level 29.5 per cent below the national benchmark.

Meanwhile the Northern Territory was up by 4.1 per cent over the quarter and 8.1 per cent year-on-year. Relative to the national home loan affordability level, the territory was 26.9 per cent lower.

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