Housing affordability improves as rates, prices fall

[Mr T]

Homes across Australia are now at their most affordable in two years as falling interest rates and a slide in house prices put property ownership in reach of more households.

A key housing affordability index that tracks the relationship between household income, mortgage costs and price of housing shows conditions are beginning to tilt back in favour of those trying to enter the housing market.

The HIA-Commonwealth Bank housing affordability index recorded an improvement in housing affordability for the fifth straight quarter in March. The index rose to 61.8 points from 57.3 points two years earlier.

If lenders had passed on the Reserve Bank's recent double-dose interest rate cut on May 1 in full it would have improved the situation for home buyers even further, Mr Harvey said.

Financial markets were this morning rating the chance of another 50 basis-point cut by the RBA as better than a 50-50 prospect.

Among the major cities, Melbourne showed the most improvement over the three months to March with its affordability index rising 7.3 per cent.

But housing in Sydney and Perth became even less affordable over the period after their indices fell 1.0 per cent and 1.8 per cent, respectively.

Affordability improved in all other capital cities and most regional areas, the HIA said.

 

[BayView]

All sounds great, but the average first home buyer going out to look for a property prolly won't see a massive diff in their repayments calculator after this most recent cut.

It'll be interesting to see the next quarter's figures on volume of sales.

 

[Aaron_C]

Well banks' servicing rates have dropped a bit so that helps in some small way. Nothing major though.

 

[Mr T]

Based on the home affordability ,Are we at the stage that First home buyers might think its cheaper to pay the mortgage then renting ??

 

[lizzie]

Based on the home affordability ,Are we at the stage that First home buyers might think its cheaper to pay the mortgage then renting ??

Only if they have brains enough to not set their expectations to high.

 

[HotRod]

Only if they have brains enough to not set their expectations to high.

Not likely.

They'll have to:

Cancel the pay TV service
Sell the third car
Take a packed lunch to work
Send their kids to public schools
Not eat out 5 nights a week
Live with concrete floors and aluminium foil windows
Not have every room in their decked out in designer lounges and artwork

The poor dears.

 

[Mr T]

Based on statistics roughtly 33% rent....

Are u of the opionion that we will see this figure rise as in many western countries?

 

[wategos]

Whats with the snobbery (jealousy ?) towards renters in this thread ? Often it's the wisest thing to do, especially in a falling market. Why buy now when it will be cheaper next year ?

 

[hobo-jo]

I think including below historical norm interest rates in a measure of affordability is completely inappropriate.

If someone buys a house today, mortgaged to the gills at low rates and interest rates started going up 6 months down the track and they are forced to sell was the property really affordable even though they had the ability to service the loan at lower rates?

In my opinion affordability should be a function of price vs income in mortgage belt suburbs. In upmarket suburbs such measures are not really appropriate.

Only if they have brains enough to not set their expectations to high.

Is the property correction over?
Only once sellers have the brains to not set their price expectations too high

 

[devo76]

I think the days of higher 10%+ rates are gone. The RBA raise rates to slow things down. Everyone carries more debt now so the desired effect is reach at a lower rate. In fact I believe the average rate will continue to drop each cycle.
Question is what will happen when rate pain is felt so low that no downward movement can be made.
Few cycles away yet but worth thinking about.

I think including below historical norm interest rates in a measure of affordability is completely inappropriate.

If someone buys a house today, mortgaged to the gills at low rates and interest rates started going up 6 months down the track and they are forced to sell was the property really affordable even though they had the ability to service the loan at lower rates?

In my opinion affordability should be a function of price vs income in mortgage belt suburbs. In upmarket suburbs such measures are not really appropriate.

Is the property correction over?
Only once sellers have the brains to not set their price expectations too high

 

[hobo-jo]

There is only so much control RBA has over (mortgage) rates when our banks are at the mercy of foregin lenders.

You might be right about days of 10%+ being over, but even a rise from 6% to 9% is a 50% increase in interest costs (a majority of the payment for those just starting repayments on a 30 year term).

 

[devo76]

There is only so much control RBA has over (mortgage) rates when our banks are at the mercy of foregin lenders.

You might be right about days of 10%+ being over, but even a rise from 6% to 9% is a 50% increase in interest costs (a majority of the payment for those just starting repayments on a 30 year term).

Agree that rates don't need to go as high and for this same reason I expect them to gradually peak lower and lower over the years.
I guess you just have to make sure your not in that first 10-20% that will be significantly wounded by the higher rates. It's these poor souls that take one for the team and eventually their hurt gets too much the economy slows and rates cone back. Your personal situation/risk tolerance/buffer that will get you through. Not the average or medium of anything.

 

[Graemsay]

Saying 10% interest rates aren't coming back is perhaps optimistic. If you look at the historical data, mortgages were around 9.5% in 2008.

If the various QE programmes from around the world feed through into inflation then they could rise sharply. Similarly, a Eurozone meltdown, or other financial crisis, could drive borrowing costs up.

I'm sometimes a bit sceptical about the impact of interest rates on affordability figures. They tend to use interest only costs (economists base housing costs on this), whereas most people have repayment mortgages.

A $100K mortgage at 9% costs $850 per month on a repayment basis, and $750 on interest only. At 6% these fall to $650 and $500. So I'd argue that such a fall increases affordability by a quarter, rather than the third that I'm betting the figures will show.

Incidentally, here in the UK it's reckoned that 20% of all mortgagees would struggle if rates rose, which supports Hobo-Jo's assertion.

 

[Fifth]

Saying 10% interest rates aren't coming back is perhaps optimistic. If you look at the historical data, mortgages were around 9.5% in 2008.

How quickly we forget.

The world is brinking on another global recession, perhaps much nastier than the last. The eastern states might as well be recession. Our current interest rates are just that. Current. To believe the days of 10% interest rates are over seems more pessimistic than optimistic. Low interest rates = economy in the potty, generally speaking.

 

[Aaron_C]

If the various QE programmes from around the world feed through into inflation then they could rise sharply. Similarly, a Eurozone meltdown, or other financial crisis, could drive borrowing costs up.

Well people kept saying that the QE in Europe/USA was going to cause inflation of Zimbabwean proportions and raise interest rates. Yet the actual economies are deflating and interest rates are at 0%. In other words, no one has any idea what they're talking about. As Fifth said, interest rates are usually low when the **** hits the fan, not when times are good.

 

[VYBerlinaV8]

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

Wow!

 

[TomW]

This should help:

Home values fell the most in at least six years in May defying Reserve Bank efforts to spark a recovery in the nation's lacklustre housing market with interest rate cuts. Melbourne led declines.

Residential property values slid 1.4 per cent across all capital cities in May, and are now down by more than 5 per cent from a year earlier, according to property analysts RP Data. The monthly fall was the biggest since the series began in June 2006, Bloomberg analytics show


Read more: http://www.smh.com.au/business/home-prices-extend-national-retreat-20120601-1zlm6.html#ixzz1wVLdTi00

 

[Ausprop]

slash and burn IRs I say... asset values falling, economy stalling.

 

[HiEquity]

http://www.asx.com.au/data/trt/ib_expectation_curve_graph.pdf

Wow!

Thanks for posting this. A picture truly is better than a thousand words!

 

[Graemsay]

Well people kept saying that the QE in Europe/USA was going to cause inflation of Zimbabwean proportions and raise interest rates. Yet the actual economies are deflating and interest rates are at 0%. In other words, no one has any idea what they're talking about. As Fifth said, interest rates are usually low when the **** hits the fan, not when times are good.

The argument that I've heard is that the stimulus is building up inflationary pressures in the system, which could lead to it rising as the economy recovers.

If the natural base rate is a couple of percentage points above inflation, and interest rates are a couple of percent above that, then if CPI hit 5% to 6% (and the UK was in that ballpark for much of last year, so it's not exactly Zimbabwean) you could see mortgages getting on for 8% to 10%.

I don't foresee 10% interest rates anytime soon. In fact, I saw a headline yesterday predicting that the UK base rate would remain low until 2017. But rather it remains a possibility in the medium term.

Yeah, I agree about no-one knowing anything. The lack of consensus amongst economists, bankers (central and commercial) and politicians is very telling.