Housing Affordability To Worsen Despite Price Fall
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Housing Affordability To Worsen Despite Price Fall

While the barrier to entry lessen with house prices set to fall, interest rates rising make serviceability a larger issue.

By Terry Christodoulou
Thu, May 12, 2022 4:55pmGrey Clock 2 min

Those out there hoping that downward pressure on housing prices would make the market more affordable are set for a shock with houses unlikely to become more affordable even if values were to drop by 20% according to the ANZ/Corelogic Housing Affordability report.

According to the report, higher mortgages would negate any benefit gained from lower prices while ANZ expects the cash rate to rise to 2.25% by May next year – which would trigger a decline in house prices and lower the deposit hurdle.

But housing affordability is still set to deteriorate as mortgage repayments rise and borrowing capacity lessens according to ANZ senior economist Felicity Emmett.

“A lot of people think falling prices will make houses more affordable, but that’s actually not the case,” she said.

“New borrowers will still need to pay higher mortgage repayments even if prices fall by 20 per cent because of the increase in interest rates.

“We found that you would need a very significant fall, something like 25 per cent to offset the impact of rate rises over the next year or so, but we don’t expect that to happen.”

ANZ is predicting house prices to drop by 6% nationally next year, Sydney is predicted for a drop of 7%, Melbourne by 6%, Brisbane 3% and Adelaide 5%.

Perth and Hobart are also expected to fall by 6% each and Darwin and Canberra by 8% each.

Housing affordability has worsened since the onset of the COVID-19 pandemic with the ratio of house prices to household income reaching a record high 9.3 nationwide.

In Sydney that ratio is now 13.3 times higher than household income whereas in Melbourne the value is 10.6, Brisbane 9.0, Adelaide 8.6, Perth 6.1, Hobart 9.8, Darwin 4.5 and Canberra 8.2.

For the average Sydneysider, it now takes 17.7 years to save the 20% deposit to buy a house in Sydney — a rise of two years and 11 months in a 12 month period.

Despite serviceability concerns, falling house prices could also shorten the time it takes to get a foot in the housing market according to Eliza Own, CoreLogic’s head of research.

“Presumably the pressure will be less on the deposit hurdle and more on the amount of income required to service a mortgage, but that is assuming we see consistent price falls off the back of higher interest rates,” she said.

However, the portion of income needed to service a new mortgage to buy a house has jumped to a record 64.4% in Sydney, up from 54% the year prior. Melbourne has lifted to 51.7% from 47.1% last year and rose to 45.25% nationally.



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Stronger demand in some areas is pushing unit rents up faster than houses

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Renters are returning to the apartment market, leading to higher growth in weekly rents for units than houses over the past year, according to REA data. As workers return to their corporate offices, tenants are coming back to the inner city and choosing apartment living for its affordability.

This is a reversal of the pandemic trend which saw many renters leave their inner city units to rent affordable houses on the outskirts. Working from home meant they did not have to commute to the CBD, so they moved into large houses in outer areas where they could enjoy more space and privacy.

REA Group economic analyst Megan Lieu said the return to apartment living among tenants began in late 2021, when most lockdown restrictions were lifted, and accelerated in 2022 after Australia’s international border reopened.

Following the reopening of offices and in-person work, living within close proximity to CBDs has regained importance,” Ms Lieu said.Units not only tend to be located closer to public transport and in inner city areas, but are also cheaper to rent compared to houses in similar areas. For these reasons, it is unsurprising that units, particularly those in inner city areas, are growing in popularity among renters.

But the return to work in the CBD is not the only factor driving demand for apartment rentals. Rapidly rising weekly rents for all types of property, coupled with a cost-of-living crisis created by high inflation, has forced tenants to look for cheaper accommodation. This typically means compromising on space, with many families embracing apartment living again. At the same time, a huge wave of migration led by international students has turbocharged demand for unit rentals in inner city areas, in particular, because this is where many universities are located.

But it’s not simply a demand-side equation. Lockdowns put a pause on building activity, which reduced the supply of new rental homes to the market. People had to wait longer for their new houses to be built, which meant many of them were forced to remain in rental homes longer than expected. On top of that, a chronic shortage of social housing continued to push more people into the private rental market. After the world reopened, disrupted supply chains meant the cost of building increased, the supply of materials was strained, and a shortage of labour delayed projects.

All of this has driven up rents for all types of property, and the strength of demand has allowed landlords to raise rents more than usual to help them recover the increased costs of servicing their mortgages following 13 interest rate rises since May 2022. Many applicants for rentals are also offering more rent than advertised just to secure a home, which is pushing rental values even higher.

Tenants’ reversion to preferring apartments over houses is a nationwide trend that has led to stronger rental growth for units than houses, especially in the capital cities, says Ms Lieu. “Year-on-year, national weekly house rents have increased by 10.5 percent, an increase of $55 per week,” she said.However, unit rents have increased by 17 percent, which equates to an $80 weekly increase.

The variance is greatest in the capital cities where unit rents have risen twice as fast as house rents. Sydney is the most expensive city to rent in today, according to REA data. The house rent median is $720 per week, up 10.8 percent over the past year. The apartment rental median is $650 per week, up 18.2 percent. In Brisbane, the median house rent is $600 per week, up 9.1 percent over the past year, while the median rent for units is $535 per week, up 18.9 percent. In Melbourne, the median house rent is $540 per week, up 13.7 percent, while the apartment median is $500 per week, up 16.3 percent.

In regional markets, Queensland is the most expensive place to rent either a house or an apartment. The house median rent in regional Queensland is $600 per week, up 9.1 percent year-onyear, while the apartment median rent is $525, up 16.7 percent.

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