The Housing Affordability Myth

Pick up a newspaper on any given day, flick to the property section and it is likely that there will be an article on the decreasing affordability of Australian residential property. In most cases, these are fact-free reports focused more on unrealistic expectations, particularly of the younger Australian demographic.

So how has housing affordability REALLY trended over time? According to research in April this year from Luci Ellis, head of the financial stability department at the Reserve Bank of Australia, real house prices in Australia have risen by around 25 per cent over the past decade. However, repayments on new housing loans as a percentage of household disposable income are currently around the long run average of the prior 30 years.

From an earlier research paper in December 2012, Ellis confirmed that capital city house prices were around 4.5 times average annual household disposable incomes. This was a little below the average of the prior decade and down from the peak of 5 recorded in the early 2000s.

The changing market dynamic that has enabled relative stability in housing affordability is that the burden of a larger loan in recent times has been offset by the savings from low interest rates brought on by the banking sector deregulation of the 1980s. Indeed, Ellis notes that ‘recovery in dwelling prices makes sense given how much affordability has improved as interest rates have declined’. This has been coupled with a rise in dual income households and high loan to valuation ratios.

So what does all this mean and why are we writing about it? Housing affordability is important for owners and investors alike. For the former, the results reported in this article highlight that the great Australian dream is still well within reach. For the latter, it enables access to property as an investment vehicle – an important fact given that on a capital appreciation measure over the past decade and the past half-decade and also over the past three years, residential property has well and truly outperformed shares.

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