Housing affordability drops to decade-lows as rates bite owners

Interest rate pressure is continuing to mount on home owners, with a new Real Estate Institute of Australia report revealing affordability has recorded its largest annual decline since the beginning of the decade during the September quarter.

The revelation comes as new figures show more home owners switched to fixed-rate mortgages in October in order to take advantage of a six month period without any interest rate increases, and to avoid any upcoming hikes.

David Airey, president of the REIA, says the results from the Deposit Power Housing Affordability report show the proportion of income required to meet loan repayments increased by 5.8 percentage points to 34.8%.

“These are quite alarming figures,” he says. “It’s quite an alarming state in the market… we could get to a place where people say they are starting to think about selling their properties.”

The report shows that during the September quarter, housing affordability decreased by 0.2 percentage points across the country, although South Australia, West Australia, the Northern Territory and Tasmania recorded slight increases.

The total number of loans continued to decrease, falling 2.9% to 101,364, with the number of new loans falling 28.3% over the year – representing the largest annual decline since 2001.

The number of loans given out to new home buyers fell by 2.8% to 22,823 over the quarter, and by 52.9% over the year, with the September quarter showing the lowest quarterly participation rate for home buyers in over six years.

Airey says that prices are not the issue for home owners, but rather interest rates moving up from a very low base.

“Interest rates have now become the main issue for home owners. Property price increases have been fairly stable, but to push required income above 35% is quite severe,” he says.

“Analysis tells us it is those interest rate increases, increases in utility costs, council charges and so on, and the fact that wages have remained relatively steady, that are causing the stress.”

The rise in interest rates has been blamed for the shift towards fixed-rate mortgages, according to figures released by the Australian Bureau of Statistics yesterday. The numbers show fixed rate loans grew as a proportion of all loans from 4.4% to 6.9%.

Analysts expect those fixed-loan mortgages to continue, especially as economists expect the next movement in interest rates to be within the next six months, pushing the cash rate up to 5%.

But Airey says, “we’ll have to worry about that when it happens”.

“But I think this may be the method by which we will see prices stall. All the economists are divided on this, but I can’t see how another interest rate rise could be justified without harming the economy.”

“We have a situation now where people’s ability to afford to stay in their properties is being jeopardise, and people are saying this is too hard, we’re going to have to look elsewhere.”

Keith Levy, national manager of Deposit Power said in a statement that buyers are now taking more of a “wait and see” approach and will continue to do so within the first few months of next year.

“These all-time lows are extremely concerning, not only is affordability on the decline but loans being issued are down and first home buyer participation in the market is the lowest it has been in six years.”

But Airey points out the low likelihood of any owners selling their properties to escape high interest rates putting enough pressure on the market to drop prices.