PODCAST: housing affordability deteriorates further

Australia’s runaway house prices have been re-writing the record books in the past year as the economy emerges from the COVID-19 pandemic and buyers scramble to get a foothold in the market.

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But how has this price surge affected the country’s housing affordability? The latest ANZ-CoreLogic Housing Affordability Report shows there has been a broad decline in housing affordability across most metrics and regions.

“The pandemic has created a situation where the gap between those who have already achieved home ownership and those who haven't has widened.” – Felicity Emmett

The report looks at housing affordability across the spectrum of people who already own their own home, those who are aspirational homeowners and those who are renting.

ANZ senior economist Felicity Emmett says people who are trying to buy their first home and saving for a deposit have suffered the most significant deterioration in affordability measures.

“For people trying to achieve home ownership it now takes a record 10.2 years for a person on a median income to save (a deposit) for a median-priced home,” Emmett says. “If we go back to the start of the data in the early 2000s, that number was five and a half years. So over a long period we've seen this decline but the pandemic has really accentuated that.

“The way that the economy has evolved through the pandemic has created a situation where the gap between those who have already achieved home ownership and those who haven't has widened.”

Rental challenge

CoreLogic’s head of research for Australia Eliza Owen explains it’s not just about affordability of buying but also renting.  The proportion of income required to service rent at the median level in Australia rose to a record high 29.4 per cent in the June quarter, creating an additional challenge for those saving for a 20 per cent deposit because their rental costs are increasing as well. The proportion of income required to service a mortgage also rose to 37.2 per cent in the June quarter from 35.6 per cent at the end of March.

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“There's generally much higher portions of income required to service a mortgage when compared to renting when it comes to our largest cities of Sydney and Melbourne,” Owen says. “So in Melbourne it takes about 41 per cent of income to service a new mortgage, compared to 26 per cent of income to rent. That's been exacerbated by subdued performance of Melbourne's rental market since the onset of COVID-19.”

She says across Sydney there is an even bigger disparity with around 49 per cent of income required to service a new mortgage compared with just 31 per cent to service rent.

Those high expenses in Sydney led more people to relocate to other capital cities and the regions, Owen says. The pandemic further highlighted differences between the metropolitan and regional markets and how many Australians have changed the way they choose to live and work.

As a result dwelling price growth in regional markets outstripped capital cities. From the March 2020 quarter to the June 2021 quarter dwelling values across regional Australia increased 18 per cent compared with 11 per cent across the capital cities.

“We're seeing more people leaving Sydney and I think that trend will continue as people are attracted to more affordable centres like Brisbane and Melbourne, especially given the drop in rental serviceability in Melbourne,” ANZ’s Emmett says. “If you're paying less rent you've got more capacity to save to buy a home.”

Affordability in Brisbane fared pretty well, despite the surge in migration from southern states to Queensland during extended lockdowns in Victoria and New South Wales. Servicing a new mortgage through the June quarter in Brisbane cost 32 per cent of median income, well below the 49 per cent in Sydney and 41 per cent in Melbourne.

Market tailwinds

“The migration trend has really reflected just how popular the south east Queensland market has been,” CoreLogic’s Owen says. “We haven't seen the same kind of strain on affordability due to its relatively low rates of capital growth over the past decade or so. That will serve as a real tailwind for that market and why it's expected to be one of the better performers through 2022.”

There remain some markets where it's cheaper to service a new mortgage than rent. Resources-based markets like Darwin and regional Western Australia see more demand for rental properties, particularly where the workforces are transitory.

One trend to watch over the next 12 months is how things change when international borders reopen, Australians can holiday overseas again and international students return, ANZ’s Emmett says.

“It's likely that we see at least a part reversal of some of the trends that grew in the pandemic but some of them will likely be more permanent,” Emmett says. “The ability to work from home and how that offers up opportunities to live in the regions rather than in the city will remain to some extent.”

ANZ recently updated forecasts for next year with housing prices estimated to rise 6 per cent in 2022 before declining about 4 per cent in 2023 as more stock becomes available, fixed mortgage rates rise and affordability bites.

“Households are very cashed up, given that the savings rate has been so high because of limited spending opportunities, including an inability to spend on overseas travel,” ANZ’s Emmett says. “I think there's probably a little bit more left in the house price tank and that we'll see further gains, just not at the same rate that we've seen over the past year.”

The ground is always shifting for people looking to rent or buy a home. An increase in mortgage rates would put downward pressure on house prices and help people saving for a deposit but it may also increase the portion of income required to service a mortgage, CoreLogic’s Owen says.

“There are those trade-offs of affordability and accessibility to think of around the housing market,” she says. “I've always thought, rather than trying to time the market to the right year or even the month, it's better to just go in with terms that you can afford for the kind of property that you want to buy when it becomes available.”

Brett Foley is senior editorial producer at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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ANZ CoreLogic housing affordability Report 2021

The ANZ CoreLogic Housing Affordability Report is a guide to the trends and main drivers of housing affordability across Australia.