Housing affordability improves as higher wages, interest rates cause prices to fall

Buying a house became a little easier during the March quarter as prices continued to fall due to rising interest rates, stock levels and wages growth, according to the latest Housing Industry Association affordability index.

But the result comes just one day after Fitch revealed a new report showing delinquencies have reached a record high. Although this is largely influenced by the Queensland floods, many real estate analysts say home owners are suffering as interest rates rise – and more hikes are anticipated.

The HIA-Commonwealth Bank Affordability Index improved by 3% in the March quarter, with the main impacts on the index being wages growth and price falls.

“Buying became just a little easier,” says HIA chief economist Andrew Harvey.

“This was helped by price falls in the capital cities, with the exception of Canberra. Affordability is going backwards there because prices are increasing and wages growth wasn’t as good.”

Affordability improved the most in Perth by 5.1%, followed by Hobart at 4.1%, Sydney by 2.5%, Melbourne and Brisbane by 1.6% and Adelaide by 1.5%. Affordability fell in Canberra by 0.9%.

The HIA said Melbourne has now taken over from Sydney in the title for least affordable housing due to weekly earnings increasing more in Sydney than in Melbourne.

But the result comes at an interesting time. Although affordability is increasing, the ability for current mortgage owners to make repayments is steadily decreasing as interest rates rise.

Yesterday’s Fitch report also comes just weeks after the major banks said they had recorded an increase in arrears, with some analysts saying this could be due to a rush of first home buyers during the financial crisis.

And yet, while many investors are awaiting in fear the June decision on interest rates, some potential first home buyers could welcome an increase to the official cash rate, which is sure to put further downward pressure on prices.

“These different factors are interesting. With affordability you have all these different components that lag on each other,” Harvey says.

“You have interest rate movements, which damages affordability, but at the same time they lead to a price decrease, so you have all these elements working together.”

But overall, Harvey says that with building activity beginning to fall off, now is a “particularly good time” to consider building a new home.

The only question that remains is where interest rates will move, and when. Harvey believes a hike before the end of the year is without question, but mortgage payers will be given a reprieve next month.

“Next month I don’t believe we’ll see a hike, but I think it’s almost guaranteed we’ll get one hike before the end of the year. But not as early as next month.”