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

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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Unpublished data RBA show a measure of affordability that includes not only house prices and incomes, but also the level of interest rates.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.

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Tony Abbott and debt

Fri, 16 Jun 2017

With Tony Abbott and governemnt debt hot news topics at the moment, I thought I would repost this artricle which I wrote in April 2013:

Enjoy, SK

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Here’s a true story. It’s about a man called Tony.

Tony is a hard working Aussie, doing his best to provide for his family. He has a good job, but such is the nature of his work that his income is subject to unpredictable, sharp and sudden changes.

Tony’s much loved and wonderful children go to a private school and wow, those fees that he choses to pay are high. He used to have a moderate mortgage, especially given he was doing well with an income well over $200,000 per annum.

Then things on the income side turned sour.

Tony had a change in work status that resulted in his annual income dropping by around $90,000 – a big loss in anyone’s language.

How did Tony respond to this 40 per cent drop in income?

Well, rather than selling the house and moving into smaller, more affordable premises, or taking his children out of the private school system and saving tens of thousands of after tax dollars, Tony called up his friendly mortgage provider and refinanced his mortgage.

In other words, Tony took on a huge chunk of extra debt so that he could maintain his family’s lifestyle. No belt tightening, no attempt to live within his means, just more debt.