Housing affordability drops again as expert calls for action

The issue of home affordability has been thrown into the spotlight, with two new surveys showing first home owners are being locked out of the market due to the prospect of interest rate rises and higher costs of living.

But Genworth Financial acting chief executive Paul Caputo says one of the biggest issues at hand is revealed in his company’s new survey, showing 20% of home owners expect to have difficulty meeting their repayments over the next 12 months.

“The confidence level among home buyers is definitely back to pre-GFC levels, which obviously indicates we are in an era of high confidence outlooks among buyers. But we are still seeing some key themes coming through about ability to pay and struggles among renters.”

The lack of affordability is echoed in the new Real Estate Industry of Australia Power Housing Affordability Report, which has recorded a sixth consecutive decline in affordability.

REIA president David Airey notes the market is now moving towards a situation where repayments require 35% of net incomes.

“The continuous increase in average monthly home loan repayments puts upward pressure on household finances, requiring home owners to decrease consumption of other goods and services to service their home loan debt.”

New South Wales is the least affordable state, according to the report, with home loans repayments requiring 38% of incomes.

The Genworth Homebuyer Confidence Index reached 99.1 points during 2010, down only 0.4 points from 2009. Caputo says the drop is negligible and that higher employment growth and lower interest rates have helped bring confidence back up.

But he also notes 20% of home owners expect to experience difficulty in repaying their home loans over the next 12 months, an increase from 15% during 2009. Among these home owners, 61% blame cost of living increases, up from 48% in 2009. About 61% also said interest rates played a factor.

Caputo says the industry should expect a slightly higher level of arrears over the next 12 months as buyers adjust to higher interest rates.

“The question we put forward is a fairly open one. There was a combination of people saying they would have to change their spending habits, they would have to spend less on discretionary spending, etc, in order to meet those higher interest rates.”

“Unless there is a major change in interest rates over the next 12 months, we will expect a slightly higher increase in arrears or hardships. But of course, markets are dynamic and if interest rates stay the way they are then that will be a positive for the market.”

Caputo says affordability is simply more difficult than it was 18 months ago. While the financial crisis brought forward stimulus measures like the first home buyers grant, those measures have disappeared, the RBA has raised rates six times and prices have only just come off an 18-month boom.

Caputo says the affordability issue is only now becoming worse because interest rate rises take some time to flow through to the market.

“The six sequential rate rises that occurred in the past year are having quite a significant impact on borrowers. There is definitely an expectation that interest rates will rise over the next 12 months, which is feeding through to uncertainty.”

“High housing prices are a big factor here. One of the questions in the survey asked whether it’s a good time to buy over the next 12 months. Last year, 50% said it was, and now only 25% say it will be a good time to buy.”

Australian Property Monitors general manager Anthony Ishac says this makes sense. The market has just come off a year of extraordinary price increases, (Melbourne prices grew by 27.9% in the 12 months to June according to APM, and by 25% according to the ABS), and interest rates remain high.

He says although price growth has tapered off, wages haven’t caught up and it will take a year of “neutral” interest rates to prompt buyers back into the market. However, it is unlikely the RBA will stay on the sidelines for 12 months.

“Last year we had all those government incentives, lower interest rates, and now we’re just seeing the effects of all those rises. That is now affecting affordability.”

“We’re also seeing rents being affected right now, and it could be that renting is a better option for some people in some locations. House price growth has definitely outstripped wage growth and it’ll take some time for both to catch up.”

Some lenders, such as Westpac and BankWest, have introduced new products and increased LVRs in order to bring first home owners back into the market. Caputo says this should help some buyers get into the market quicker than they would have otherwise.

“Rising interest rates have had a marked influence on confidence. That said, there will still be opportunities for would be homebuyers who are well positioned to service a loan but don’t have a large deposit. Lenders mortgage insurers are still insuring 95% LVR loans to suitable applicants, which helps make homeownership possible sooner,” he said.