Housing affordability - still favourable according to RBA

Wed, 01 Mar 2017  |  

This article first appeared on the Yahoo 7 website at this link: https://au.finance.yahoo.com/news/798497-220715204.html

----------------------------------------

Housing affordability - still favourable according to the RBA

The housing affordability issue remains a hot-button point in Australia with prices rising at a solid pace.

This rise in prices has created a perception that housing is getting further out of reach for many, especially first home buyers, as the amount of money that needs to be borrowed to buy a house continues to increases at a pace about incomes.

And that is patently true. In the last year alone, house prices are up around 10 per cent, while incomes are up around 2 per cent.

But the measure of housing affordability that looks solely on house prices and incomes hides a vital element – namely, interest rates. It almost goes without saying that the interest rates paid on a mortgage will fundamentally determine the affordability of that loan and therefore that house.

Paying 4.5 per cent, as is commonly available for a standard mortgage now, it a lot easier – that is affordable – compared with the same loan charging a 9 per cent interest rate, by way of example.

It is why the Reserve Bank of Australia (and other competent analysts) factor in interest rate when they assess comprehensive measures of affordability. Indeed, numerous RBA research articles of the topic forcefully conclude that the structural lowering of interest rates from the late 1980s has been a vital influence on the rise in house prices but has not significantly impacted affordability.

Unpublished data RBA show a measure of affordability that includes not only house prices and incomes, but also the level of interest rates. The chart of that data, reproduced in the above link, shows the proportion of a household’s income needed to service a loan on an average house with an 80 per cent loan to valuation ratio with a standard variable mortgage over 25 years.

There are a number of standout issues with these findings.

Perhaps most notably is the point that over the past 35 years, the proportion of an average household income devoted to servicing an average mortgage has fluctuated between 20 and 30 per cent and has averaged around 23 per cent. The current ratio is 24 per cent.

In other words, housing affordability right now is close to the long run average and well below earlier peaks. To be sure, it is above the levels on the earlier to mid 1980s and again in the period from the mid-1990s to the mid-2000s, but it is well below the level of the late 1980s and the period around 2005 to 2012.

The interplay of house prices, incomes and interest rates over 35 years has created the environment of broadly steady affordability. If it wasn’t high interest rates that was the burden (the 1980s), it was high unemployment (the 1980s and 1990s) or high house prices (now).

And of course there will always be some areas where prices are out of kilter with the national averages which allows for some people to grandstand about how tough it is to buy a house in these over inflated markets. Fair enough for Sydney and Melbourne at the moment. But rarely do we hear about the myriad of examples of extremely favourable affordability such as in Perth, Adelaide, Hobart, Darwin and a range of regional cities and towns.

For those wishing for falling house prices so they might be able to buy into the Sydney or Melbourne markets, there is a fundamental flaw in their thinking. Price are unlikely to fall unless there is a significant change in interest rates or household incomes.

What if the fall in house prices being wished for by some was due to interest rates being hiked so that mortgage rates were 8 or 9 per cent? What if prices fell because the unemployment rate went to 8 or 9 per cent?

It is likely that is when the complaints would turn to interest rates and unemployment and that the government needed to do something about it even though prices are lower.

comments powered by Disqus

THE LATEST FROM THE KOUK

Politics Panel: Australia's intergenerational gap

Fri, 25 May 2018

I was one of the panel members of this podcast which was on ABC Radio National. 25 minutes of interesting discussion.

At this link: https://www.abc.net.au/radionational/programs/breakfast/politics-panel-australias-intergenerational-gap/9798848 

Politics Panel: Australia's intergenerational gap

 With the federal budget handed down and the battle lines emerging for the next election, Australia's intergenerational gap is shaping up as a major political issue.

The Coalition is promising a host of sweeteners for retired voters while Labor is promising to pump more money into education and get housing prices down.
If you're a voter, there's a good chance your view of those promises will be informed by the year you were born.

Do we need to be worried about Australia's economic outlook?

Tue, 22 May 2018

This article first appeared on the Yahoo7 Finance web site at this link: https://au.finance.yahoo.com/news/need-worried-australias-economic-outlook-060611703.html 

----------------------------------------------------

Do we need to be worried about Australia's economic outlook?

The Reserve Bank of Australia reckons that the next move in official interest rates is more likely to be up than down. RBA Governor has said so in recent weeks as he talks up the prospects for the economy over the next year or two.

This is disconcerting news for everyone out there with a mortgage or a small business loan, especially in a climate where the business sector is doing it tough and when wages growth is floundering near record lows. The good news is that the RBA is likely to be wrong and the next move in interest rates could be down, such is the run of recent news on the economy. Failing an interest rate cut, the hard economic facts suggest that any interest rate rises are a long way into the future and if they do come, there will not be all that many.

At this point, it is important to bring together the issues that would need to unfold to see the RBA pull the lever to hike interest rates.  At the simplest level, the start of an interest rate hiking cycle would need to see annual GDP growth above 3.25 per cent, the unemployment rate falling to 5 per cent and less, wages growth lifting towards 3 per cent and more and underlying inflation increasing to 2.5 per cent.

This is where the RBA expectation for higher interest rates is on very thin ice.