Housing affordability expected to continue to improve as interest rates remain stable

The housing market is now at its most affordable in several years, according to new data from the Housing Industry Association, as reductions in fixed mortgage rates and wage growth has helped first home buyers purchase a property.

The data comes just days after the Australian Bureau of Statistics released disappointing data on the construction industry, although the HIA says the low amount of work means more builders are bidding for projects and lowering prices.

The Housing Industry Association-Commonwealth Bank Housing Affordability Index rose by 0.8% in the June quarter, with the index now 7.2% above the same corresponding period in 2010.

“When you consider the earnings growth we’ve seen, a lot of improvement has been driven there. That’s also offset a small price increase, so this isn’t a bad outcome. We’ve had two quarters of improvement,” says HIA economist Andrew Harvey.

Wages have risen 1.2% in the June quarter, official figures show. “If you leave aside the GFC, this is the most affordable position the housing market has seen since 2006,” says Harvey.

The volatility in global markets has actually helped the result, with the RBA leaving interest rates on hold. Australian banks have also been able to leverage favourable lending markets, with fixed mortgage rates being reduced.

Harvey says while the HIA believes the next move for interest rates will be upwards, he nevertheless acknowledges that more analysts now believe the RBA will cut the official cash rate before the end of the year – perhaps even next month.

“We still think that interest rates are much more likely to stay on hold, but if interest rates start being cut as most of the market expects, it’s a massive boost for the housing industry.”

“Interest rates are far and away the biggest variable in housing demand, and it’d be great for the industry. Even if there’s not a cut in the official rate, we may see movements in lending rates as Australia becomes preferable for investment.”

And although the construction market is suffering, with numerous collapses and data showing that residential building projects fell by 4.1%, Harvey says this has actually increased competition.

“On the supply side, building levels are decreasing so there is more competition and they are offering incentives. Whether it’s a plasma television, or some other bonus, or indeed their own first home owner’s grant. All of these things will increase affordability.”

Overall, Harvey says as prices remain on hold, buyers can expect affordable prices for the foreseeable future.

“Our view is that property prices will be flat. We’ll continue to see reasonable earnings growth, and with the fallout in global markets, potentially more mortgage lending rates continuing to head down.”

The data showed housing affordability increased by 2% in Sydney, by 1.9% in Melbourne, by 3.2% in Perth and by 1.5% in Hobart. Affordability in Brisbane actually fell by 2.7%.