Housing affordability improves but rising rates cloud 2011 outlook

Housing affordability improved slightly during the September quarter due to a stall in prices but the market is still much too expensive and no change is expected for some time, according to the latest Housing Industry Association-Commonwealth Balk Affordability Index.

However, SQM Research founder Louis Christopher says he expects affordability to improve over the next six to eight months as excess stock and a lack of buyers continue to put pressure on prices.

“I do think that affordability will improve over the next six months. It is particularly bad right now, and has deteriorated, but it will improve,” Christopher says.

The HIA said yesterday the affordability index rose by 3.6% in the September quarter as home prices declined. But chief economist Harley Dale says affordability is still low, and that the index has fallen by 18.3% over the year due to the 2009 price boom.

“The three interest rate rises in the first half of 2010 have really hit home and housing affordability is once again on a clear downward trajectory,” Dale said.

“A further rate hike in November will see affordability drop in the December quarter, an outcome obviously not aided by trading banks adding fuel to the mortgage rate fire.”

The index found the median dwelling price is now at $483,400, down from the $502,700 recorded in June, with a monthly repayment of $3,006.

Adelaide recorded the biggest improvement in affordability at 6.3%, while Perth came in second with a 5.9% improvement. Brisbane improved by 5.4%, while Hobart improved by 1.2%.

Melbourne has been hit with the title as Australia’s least affordability city with a ranking of 50.8%, although it has improved by 1.7%. Sydney only improved by 1.9%, allowing Melbourne to take over, while Canberra suffered a massive blow, with affordability deteriorating 8.6% to an index of 57.8.

Outside the capital cities, affordability improved by 5.4% in Western Australia, followed by 4.6% in regional Tasmania and 3.5% in regional Queensland. New South Wales and South Australia improved by 1.9% and 0.1% respectively, with affordability in Victoria fell by 1.2%.

But there is some hope. Christopher says while affordability is still lower than at this point last year due to the massive increase in prices over the year, affordability will rise over the next six months as stock levels increase and buyers back away.

“This has been driven by a surge in housing prices that occurred earlier this year, along with a rise in interest rates. I would argue that although affordability has deteriorated, it will improve from this point forward.”

“And I think that will happen in all capital cities as well. As that stock increases and there are fewer buyers, there will be downward pressure on prices.”

The latest data from a range of research firms including RP Data, Rismark and the HIA have all revealed housing prices have stagnated during the last six months. But despite that data, Dale says affordability isn’t set to move either way for some time.”

“I think that over the short-term, we won’t get movement either way. We’re still going to see borrowing costs move higher still in 2011, and that will keep affordability down. I don’t think we’ll see great change in either direction.”