Housing affordability improves slightly but not all buyers will benefit

ANZ is forecasting a 15 to 20 per cent price decline in house prices from the peak of April to the end of 2023 as the RBA lifts the cash rate to 3.35 per cent by the end of this year.

“This leads to an interesting conundrum for some first home buyers and renters – house prices may be falling but many other living costs continue to rise sharply including fuel, electricity and food prices.”

Falling housing prices have led to a few bright spots in terms of housing affordability. For the first time in almost two years, the so-called deposit hurdle for new home buyers is falling in capital cities amid the downswing in home values.

The time needed to save a 20 per cent deposit on the median dwelling value has fallen by about three months in Sydney and Melbourne to 13.7 years and 11.1 years respectively. This is the first decline in the deposit hurdle for these cities since September 2020.

Canberra and Hobart also recorded smaller reductions in the time required to save a deposit, by around one month in each of those cities.

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This decline in the deposit hurdle across some capital cities comes as ANZ expects the housing market downturn to accelerate and broaden in coming months.

This leads to an interesting conundrum for some first home buyers and renters – house prices may be falling but many other living costs continue to rise sharply, including fuel, electricity and food prices.

These costs are being felt right across Australia but are particularly acute among renters. Non-discretionary inflation – the increase in the prices of household necessities –jumped to 7.6 per cent in the year to June.

Record rents

Within this environment the portion of income required to service rent rose to 30.9 per cent nationally in June. These rising costs have meant some households may not be able to divert as many savings to a deposit, further delaying home ownership.

The portion of income required to service rents reached fresh record highs in regional Australia and climbed in capital cities as well in the June quarter. Median rent values nationally increased to $526 per week through June, up $50 per week from a year ago.

Rental affordability is of increasing concern with annual growth in the CoreLogic Rent Value Index at a record high of 10 per cent for dwellings nationally. National vacancy rates for rental properties were also at a series low of 1.2 per cent through August, suggesting further upward pressure on rents.

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Additionally, data from CoreLogic and the Australian National University suggest a median income household would need 44 per cent of income to service repayments on a new mortgage for the median dwelling value. That’s the highest level since June 2011 and a notable jump from September 2020 when just 33 per cent of income was needed to service a new mortgage.

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While many homeowners are facing increased mortgage costs, many households are well placed to weather further interest rate rises.

Many recent borrowers remain on low, fixed mortgage rates: the latest upswing in housing values saw an unusually high incidence of fixed-rate lending. The portion of housing finance secured on fixed-rate terms (including refinancing) peaked at 46 per cent in August 2021, up from about 15 per cent prior to the COVID-19 pandemic, according to the Australian Bureau of Statistics.

Borrower assessments take potential rate rises into account: mortgage serviceability assessment buffers were increased from 2.5 per cent to 3 per cent by the Australian Prudential Regulatory Authority from November 2021. This means people who took out a new home loan over the past nine months should be able to absorb rate rises 3 percentage points higher than the variable rate at the time their mortgage was initiated.

Increased savings: the pandemic period saw consumers make large contributions to their offset and redraw accounts. In June the median owner-occupier borrower with a variable rate loan had a buffer equivalent to about 18 months of prepayments. So as variable rates rise most borrowers may have significant savings to draw on.

Wage growth: as of July, the Australian unemployment rate was 3.4 per cent, the lowest level since August 1974. The tight labour market is gradually feeding through to higher wages with average earnings per hour up over 5 per cent in the year to March.

While affordability indicators around mortgage serviceability may deteriorate further in the coming quarters as interest rates rise, these factors should help households cope with the rising cost of mortgage repayments.

It is also worth noting serviceability may improve in 2024 when ANZ expects the RBA to begin cutting the cash rate. ANZ economists forecast the RBA will cut the cash rate by 50 basis points by the end of 2024.

While the year ahead presents the challenges of rising interest rates, the deposit hurdle and value to income ratio affordability metrics should show broad improvement through the housing market downswing

Felicity Emmett is a Senior Economist at ANZ and Eliza Owen is Head of Australia Research at CoreLogic.