Housing Affordability in Australia

Wednesday the 24th of June, 2009 18 Comments »

Posted by Iden Money .

(This article looks at housing affordability on a national basis, covering data available as at March 2009 and analysing each state and territory individually. Historical data back to 1986 is also included.)

QUESTION:

Why is it that you can buy your dream home in one region of Australia for far less than in another region? Not just in different states but in different regional areas within states?

What drives market house prices? The answer is many things, but a few have considerable influence on the amount of money you have to pay for a house in the area you want to live.  Some major factors are:
1.    The state, city and suburb you want to live in
2.    The services available in that area
3.    The economic circumstances of that area
4.    The availability of  houses and units
5.    The levels of employment, inflation, wages and income in that area
6.    Interest Rates

Market prices are very much determined by what people can afford to pay.

Once you have determined where you want to live, you must determine if you can afford to live there. Points 1 – 4 above remain fairly constant over time, in a particular area. However points 5 and 6 are changeable dependent on the economy at the time, particularly interest rates, which have a major influence on the affordability of a home loan.
There are a number of Affordability Indexes. These indexes plot home loan affordability over time and readily explain when a certain market becomes overheated. The usual response to an overheated market is for house prices to retreat back to the level that purchasers can afford. This is explained in the information below which sets out how these three Affordability Indexes operate.

These indexes are:

1.    The Real Estate Institute of Australia (REIA) Home Loan Affordability Indicator
2.    The Commonwealth Bank of Australia–Housing Industry Association (CBA–HIA) Housing Affordability Index
3.    The BIS Shrapnel Home Loan Affordability Index.
Each of these indexes measures affordability with respect to new loans only.
They look at the trend in home loan affordability over the past 22 years and show how interest rate movements have affected affordability over time.

Home Loan Affordability Indexes

1.    The REIA Home Loan Affordability Indicator is a ratio of median family income to average new loan repayments. The REIA indicator divided by 10 shows the number of times that median family income exceeds average home loan repayments in a period. An increase in the REIA indicator represents improved affordability.

2.    The CBA–HIA Housing Affordability Index measures accessibility to home ownership for an average first home buyer. It is calculated as the ratio of average disposable income per household to the ‘qualifying’ income required to meet repayments on a 25-year loan, for 80 per cent of the median price of an average established dwelling purchased by a first home buyer. The index divided by 100 shows the number of times that average household disposable income exceeds the minimum income needed to meet repayments on an average established dwelling. As with the REIA indicator, an increase in the CBA–HIA index represents improved affordability.

3.    The BIS Shrapnel Home Loan Affordability Index shows the proportion of full-time male average earnings needed to meet the mortgage repayments on a ‘typical’ housing loan. A typical housing loan is assumed to be a 25-year loan for 75 per cent of the median house price. A decrease in the BIS Shrapnel indicator represents improved affordability.

Click here to view/download the full report.