Housing affordability declines as buyers devote 35% of income to repayments, REIA report shows

The proportion of income needed to meet home loan repayments increased by 0.5 percentage points to 35.3% in the 2010 December quarter, new figures from the Real Estate Institute of Australia reveal.

The figure also comes alongside numbers which shows the proportion of new home buyers in the residential market dropped to 15.6% – the lowest level since 2004.

The research also coincides with new data released by the Australian Bureau of Statistics this morning, which found the number of commitments for new home construction fell by a seasonally adjusted 9.4% in January.

Commitments for purchases of new homes also fell by 13.5%.

Housing Industry Association economist Harley Dale says the result lines up with the HIA’s own research, which shows a considerable decline in housing affordability.

“I don’t find the result surprising at all, given the period we’ve seen the update for. We did see a relatively benign quarter for dwelling prices, but we did see a rise in mortgage costs during that quarter.”

The Reserve Bank of Australia decided to raise interest rates by 25 basis points in November – a move that was followed by all four major banks, including Westpac, which increased its own rate by 45 basis points.

“Because of that activity I don’t suspect there would be too many people surprised by the release of this date,” Dale says.

The Australian Capital Territory was the most affordable state, the report shows, with the proportion of income required to meet payments falling to 18.5%, 16.8 percentage points below the national average.

New South Wales was the least affordable state, where the proportion of income needed to meet repayments grew 5.9 percentage points to 39.5%.

Loans to first home buyers are higher in New South Wales than in any other state, increasing by 3.5% from the previous quarter. However, they are down by 39.6% for the year.

In Victoria, home buyers need 36.1% of their income to pay for repayments, (up from 33.6% in December 2009), and is the second least affordable state in the country.

South Australians require 35.3% of their income to meet repayments, Western Australians need 27.6%, Northern Territory owners need 24.7% and Queensland residents require 33.4%.

The market is faring better in Tasmania, where the REIA says only 29.2% of a home owner’s income is needed for mortgage payments.

The report points out a number of key factors affecting affordability – interest rates, family income, and rising housing prices. Over the December quarter, median house prices increased by 2.4% in all capital cities, the REIA says, and the average variable standard rate rose by 0.4 percentage points to 7.4%

These factors are reflected in the number of actual loans being given out to first home buyers.

While the actual number of loans to first home buyers increased by 6.8% to 24,374 over the quarter, this is the only quarterly increase recorded during 2010, and over the year, loans dropped by 41.2% – the fourth consecutive annual decline.

First home buyers now make up 15.6% of all borrowers, representing the lowest quarterly participation rate since September 24. The average loan size to first home buyers has also fallen 0.9% to $280,500.

Dale says while rising interest rates and living costs do put pressure on home buyers, the fact construction isn’t keeping up with demand also means the problem will worsen if nothing is done.

“Overriding everything is the fact that once the low interest rate environment has been rescinded, and the additional stimulus to first home buyers taken away, the home building market has been in a downward trajectory.”

Total building approvals plunged by a seasonally adjusted 15.9% in January, according to the latest data from the ABS.

“The overriding supply issues haven’t been tackled, and they need to be.”

However, the REIA points out what happens to home buyers will very much depend on where the RBA moves on interest rates. Another hike isn’t expected until the second half of the year.

“It will be important to see how the big four banks will respond this year to monetary policy decisions. Whether they will continue increasing mortgage rates more than the increments in the cash rate or will adjust mortgage rates accordingly to cash rates movements will be crucial to mortgage holders.”

Dale agrees, saying first home buyer activity may increase if consumers believe rates are on hold.

“There is that prospect, yes. Certainly if we continue to have an environment where the wider community and finance are stable, there is the potential to see some more activity among first home buyers.”