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Housing report - housing affordability drops again

7 November 2002

Housing affordability drops again – driven by ongoing hikes in property values

Another quarter of strong house price growth – up 6.6 per cent - has seen housing affordability fall for the fourth consecutive quarter.

According to the latest Commonwealth Bank/Housing Industry Association Housing Report released today, housing affordability for first home buyers fell by 5 per cent in the quarter to September 2002 and more than 17.5 per cent against the previous year, even after taking into account the availability of the $7,000 first home owners grant.

Sydney continues to be the least affordable city in Australia, followed by Melbourne, Brisbane, Perth and Adelaide. Surprisingly, the greatest decline in affordability experienced over the quarter was the nation’s most affordable city, Hobart.

The continuing decrease in affordability was experienced despite modest increases to average household incomes and interest rates remaining on hold over the quarter.

"Low interest rates explain most of the rising house price story, but a further influence is the $34 billion worth of home improvement activity carried out on housing stock over the past two years," according to Ruth Morschel, HIA’s Executive Director of Public Affairs and Policy.

Lyndell Fraser, General Manager, Mortgage Wealth at the Commonwealth Bank, added: "The past 12 - 18 months has seen a real shift away from people investing in the share market to re-investing in their homes, with over 20 per cent of our customer base accessing the equity in their home for renovations. Our research also shows that around half of our customers intend to renovate in the next 18 months. In addition to low interest rates, this is having a major impact on property values."

The average first homebuyer household now needs 21.9 per cent of their income to meet the monthly repayments on a median priced home. This proportion has been edging up steadily over the year, but remains well down on the difficult times of the late eighties and early nineties, where buyers needed closer to 30 per cent of their income.

Ms Fraser said, "While property prices have continued to increase, people should avoid excessive optimism about the property boom continuing at these levels and steer clear of over-committing themselves getting into the property market.

"Home owners should follow a sound regime in their home loan repayments and make allowances for change, ensuring they are well-buffered against potential stabilising of the property market, as well as changes in interest rates or personal circumstances."

According to Ms Morschel, "The key driver of declining affordability at present is a lack of adequate land. Building costs have been kept under control for the past 18 months but the shortage of serviced land and the accompanying land price hikes have put even the most modest homes out of reach of many low income families."

"There is no single solution to improving housing affordability. HIA welcomes research into new financial initiatives, but these need to work hand in hand with more fundamental reforms that focus on stamp duty, regulatory costs and land release," Ms Morschel said.

The September quarter Affordability Index shows that the loan repayment needed to service a typical first home mortgage rose by $83 per month to $1,328, absorbing 21.9 per cent of average household income. This compares to 20.8 per cent in the June quarter of 2002 and 18.1 per cent in the September quarter 2001.

The Commonwealth Bank/Housing Industry Association Housing Report is one of Australia’s leading indicators on the relative price of housing, issued each quarter since December 1984. The report uses lending data from the Commonwealth Bank - Australia’s largest home lender, with more than 1.1 million home loan customers.