Housing affordability tipped to remain strong for two years

Australian housing prices are at their most affordable level in seven years, with falling prices and new Government grants pushing new buyers into the market.

The Housing Industry Association-Commonwealth Bank First Home Buyer Affordability Index recorded a 14.6% increase in the March quarter, after a 40% increase during the final quarter of 2008.

The new research shows that the average home loan repayment dropped by 11% from $2056 a month last year to just $1831.

The index and accompanying report also show that the median first home price has dropped from $436,000 in the December quarter of 2007 to just $383,800 in the March quarter 2009.

All states recorded improvements in housing affordability. NSW recorded a 17.2% increase to the index, Queensland rose by 12.5%, with South Australia up by 22.9% and Tasmania by 31%

Western Australia also increased by 13.7%, the ACT by 3.4% and Victoria by 13%.

The cheapest home loan repayments can be found in Hobart at $1306 a month, with the most expensive in Canberra at $2265.

HIA chief executive Chris Lamont said in a statement that the first home buyer grant is responsible for the figures.

“The grant has been highly successful in creating and securing jobs in the residential construction sector.  It is also assisting in boosting the supply of housing, which we know to be grossly short of the nation’s requirements,” he said.

But Louis Christopher, head of property research at Advisor Edge, says that the main reason the housing affordability index is so high is due to lower interest rates, not the home owner grant.

“Judging by how I think the index is put together, what it’s a reflection of is basically cuts in interest rates more than anything else,” he says.

“I would imagine that these affordability levels will continue for some time, but I think you will probably see some small additional rises.”

Tim Lawless from RP-Data also says that housing affordability will be tied to movements in the official interest rate.

“A large part of it depends on interest rates. The consensus is that we’re reaching the bottom of the interest rate cycle very soon, bringing the mortgage rate down to around 2%, then we’ll see people fixing. Banks have already raised fixed interest rates, and more buyers are fixing loans.”

“I think during most of 2010 we are going to see interest rates remain quite low. Unemployment will get higher and there will be pressure on the reserve bank to keep rates low.”

Christopher says that housing affordability will continue over the “medium term” unless the market adjusts itself, which he says has been known to happen after slow periods.

“I think certainly over the medium term it’s going to stay at roughly these levels, and then we’ll probably see a situation where interest rates rise. At that time we’ll see a rising housing market,” he says.

“I would say there’s a two-year window there. The risk is the two years is narrowed because we might see an unexpected acceleration in housing market prices, but I’m not saying that’s going to happen. What’s happened historically during low interest rates is that the market has picked up in activity.”

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