Recent trends in housing affordability

As dwelling prices continue to increase across most markets, there has been growing concerns about housing affordability. Indeed, APM nationwide median prices have reached $723,000 for houses and $528,000 for units, with Sydney house prices averaging $1.04 million.

Given escalating prices, how does housing affordability look and how is it impacting the market?

For us, housing affordability is more than just prices. It includes household incomes, mortgage size and interest rates. In other words, housing affordability reflects repayment capacity, particularly at the start of the mortgage, before any build-up in home equity.

Accounting for these factors, Sydney is undoubtedly the most over-stretched, with stronger prices driving affordability to levels last seen in 2004. For other markets, however, housing affordability is still in very good shape, given milder gains in prices, modest income growth and, most importantly, cyclically low interest rates.

Meanwhile, the latest ABS Housing and Occupancy Costs survey tells a similar story. As reported by 14,000 households, housing costs for mortgage owners continue to fall, totaling just 16% of household incomes in 2013-14. The declining share reflects lower mortgage rates, while the low level reflects substantial progress to pay down outstanding balances, as households take advantage of lower repayments.

While housing affordability remains favourable across most capital cities, Sydney is starting to become overstretched and will likely reach prior extremes in 2016. Already, this affordability constraint is becoming more apparent in Sydney as its starting to see slower auction clearance rates. For other capital city markets, housing affordability is far less of a market constraint.