Housing affordability drops as surging auction results spark fears of prices overheating

Housing affordability declined during the December quarter due to sharp price increases and three consecutive interest rate rises, the latest figures from the Housing Industry Association reveal.

The figures come as BIS Shrapnel economist Jason Anderson says some areas in the outer suburbs of Melbourne could be due for some price decreases, with price growth higher than the rest of the country and a lack of first home owner purchases.

The latest results from the Housing Industry Association–Commonwealth Bank First Home Buyer Affordability Index dropped by 18.4% during the December quarter. The monthly loan repayment needed on a typical mortgage increased from $2,087 to $2,505 – a rise of 20%.

Mortgage repayments accounted for 25% of total first home buyer income.

HIA economist Ben Phillips says affordability has deteriorated due to sharp increases in housing prices in 2009, and the three consecutive interest rate rises.

“One of the most important parts of the index is the loan repayment area, and we’ve seen that typical loan repayment go from $2,087 to $2,505. The reason for this is because house prices have increased, with the variable mortgage rate going from 5.1% to 6%, beyond the RBA’s 75-basis point increase.”

However, Phillips says there is still a lot of positivity in the market, and expects price rises to continue over the next year.

“I think the general underlying factors remain pretty strong over 2010. There is a much stronger economy in play, and that’s the main thing. People are certainly a lot more positive, and as I imagine as we go forward there will be rises, fuelled by population growth and still reasonable low interest rates.”

“If you’re renting you’ve probably experienced hefty hikes, but property owners are having a great time of the market. For home owners, it’s great, but for first home owners and renters, it’s a difficult market.”

Meanwhile, BIS Shrapnel economist Jason Anderson says some areas in the outer suburbs of Melbourne, especially in the East, could see declines.

It comes after a number of Eastern suburbs have seen dramatic increases in prices, with Burwood recording a 20+% increase in average price to over $800,000.

“We’ve had big increases in prices across Melbourne in 2009, and if you look at over the last three years Melbourne prices have grown in the range of 40-50%, and that’s much bigger than the rest of Australia. Additionally, we’ve seen the highest take-up of the first home owner’s grant in Victoria, and compared to the rest of the country that’s high as well.”

Anderson says the lack of the first home owners grant, and sharp increases, could result in a drop in prices due to the drop in demand.

“Our view is that we’re in for a flat first half of 2010 in terms of prices, and in that environment it wouldn’t surprise me to see figures showing declines in parts of Melbourne.”

Meanwhile, auction results have continued to perform well. In Melbourne, chief executive of the Real Estate Industry of Victoria, Enzo Raimondo, said in a statement the results show demand is still high.

Results this weekend have surpassed this time last year and provide a further indication that demand for residential property has not abated over January. This weekend last year saw 437 auctions and a clearance rate of 77%, compared to 85% this weekend.

The number of auctions increased to 711 over the weekend, with the total value of sales at $469 million. Next week just under 1,000 auctions are expected to be held.

In Sydney, the total number of properties on the market reached 261 over the weekend, resulting in a clearance rate of 72%. The total value of sales reached $158 million.

Brisbane recorded just 11 properties sold, resulting in a clearance rate of 52% and a total value of $4.7 million, while Adelaide recorded 20 properties sold, with a clearance rate of 65% and total value of $9.8 million.