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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, 2022Grey 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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