Low interest rates improve housing affordability

There’s good news for mortgage holders and first home buyers: record low interest rates have contributed to the most favourable housing affordability conditions in 12 years, according to the Housing Industry Association (HIA).

The HIA-Commonwealth Bank Housing Affordability Index improved by 2.1 percent in the first quarter of 2014 and affordability is now 10.8 percent more favourable than a year ago, HIA senior economist Shane Garrett said.

“The continuation of record low interest rates, combined with decelerating home price increases and growth in earnings over the quarter, saw the HIA-CBA Housing Affordability Index improve to its most favourable level since March 2002,” Garrett said.

While Garrett admitted that property price increases have been “significant” over the past year, he said the impact of low interest rates and continued growth in Australians’ incomes has offset price rises to make home ownership more affordable for existing home owners and those looking to enter the market.

Garrett went on to note that with the Reserve Bank of Australia (RBA) signalling that interest rates are set to remain low for some time and with property price pressures easing off, housing affordability will remain favourable for the foreseeable future.

Most economists are expecting interest rates to remain at their current levels for the next 12 months, and to begin to rise in the second half of 2015.

The official cash rate as set by the RBA is currently at 2.5 percent, with Rate City listing mortgages with interest rates beginning from 4.58 percent.

The Australian Capital Territory recorded the strongest improvement in housing affordability, according to the HIA Index, increasing 7.7 percent in the March quarter.

Two of the six surveyed capital cities recorded an improvement in affordability, with Sydney improving by 2.2 percent and Perth by 0.1 percent. Affordability remained unchanged in Melbourne, while affordability declined in Adelaide, Hobart and Brisbane. Adelaide posted the biggest fall in affordability of -4.6 percent, with Hobart posting a -1.3 percent decline and Brisbane -0.7 percent.

Garrett said despite the cyclical improvement in affordability, ensuring affordable housing is a critical issue that requires government attention.

“Ensuring adequate and affordable housing for those harbouring aspirations to one day enter the home ownership market, and for the large number of rental households in Australia, requires a concerted policy focus on boosting new housing supply. That needs to be a key policy priority for all levels of government,” he said.

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