Are Australia's houses affordable?

With a low cash rate enabling borrowers to take out home loans with competitive interest rates, you might think buying property is as easy as pie. But are Australia’s houses affordable enough to make the home ownership dream a reality? We delve into the three biggest housing affordability factors!

Home loan rates at record lows

The Reserve Bank of Australia’s cash rate, which is usually passed on to borrowers by lenders, is a defining factor in home affordability. Record low interest rates have been positive for new and current home buyers, but when they go up — how will that impact home owners?

The Inquiry into Affordable Housing is addressing the homeownership quandary. Malcolm Edey, Reserve Bank of Australia Assistant Director (Financial System), recently addressed the inquiry board.

“Housing loan interest rates are currently as low as they have been in a generation, and households are not artificially constrained from borrowing as much as they can reasonably be expected to repay,” Edey said.

“[I]f there is a perceived affordability problem in Australia, it is not due to a lack of finance.”

But RateCity’s Product Director, Peter Arnold, warned Australian home buyers that they need to be realistic about how much they borrow in case of a future rate rise.

“Variable rates are very low now. But it’s really when, not if, rates will go up,” Arnold said.

“We’re likely to return to historical highs or at least historical averages around seven percent so borrowers need to plan now for those higher rates in coming years.”

So is affordable finance the answer for families and couples looking to secure that humble home?

Supply factors a big issue

It’s not only interest rates driving housing affordability but also supply and demand. It’s not unusual to see large groups of buyers queuing for open houses today, and with so many buyers bidding on the same properties, the prices can be driven up.

In presenting points to the Inquiry into Affordable Housing, Edey explained that affordability and property prices are influenced by both supply and demand factors, with household incomes, loan availability and loan costs affecting market demand. These factors tend to have the “predominant influence” on movements in home prices over the short to medium term.

But it’s important not to forget supply issues, either. Edey also noted that “supply factors are critically important” in the long term. This means the opening up of new land lots and property developments are essential actions to address affordability in the future.

House price growth slows down

The good news for buyers is that housing prices have begun to stabilise.

New findings have shown a softening of the Australian house market, which could bode well with would-be buyers, eager to get their leg up on the property market, without breaking the bank.

Dwelling value growth was flat last month, with 0.1 percent growth across the combined capitals, according to the RP Data CoreLogic September Hedonic Home Value Index Results. In the three months to September 30, dwelling values increased by 2.9 percent.

Adelaide experienced the most significant monthly growth in relative terms (0.9 percent), while Sydney and Brisbane followed closely behind, with growth of 0.8 percent and 0.7 percent, respectively.

Tim Lawless, RP Data Research Head, explained that annual appreciation in residential property values has moderated since April. He explained that the housing market is still “buoyant”, though the 12-month capital growth trend has been softening since mid-2014.

“A moderating annual trend, as well as the relatively flat September result, is likely to be welcome news to policy makers and potential buyers after the winter months recorded the largest capital gain since 2007,” Lawless said.

Taking in all these factors, the most important consideration when buying a property is calculating what you can comfortably afford to borrow and repay now — and in the future.

Buyers should use a home loan calculator to ensure they’re getting a suitable finance product for their needs and not borrowing beyond their means.

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