Property affordability lurches from stress to panic

The voracious appetite of the average home loan now gobbles up more than half of the median family income.

In a devastating critique of the Australian housing landscape, the latest REIA Housing Affordability Report, released Friday (7 March), shows housing affordability has declined to a new all-time low.

The average loan repayment now amounts to 50.1 per cent of the median family income, an increase of 1.4 percentage points, and the highest proportion since the Real Estate Institute of Australia (REIA) started monitoring housing affordability in 1996.

Given that mortgage stress occurs when repayments exceed more than 30 per cent of household income, mortgage torture or panic might be more apt descriptors for the current norm.

The decline has been spectacular.

In 2002, just over a quarter of a family pay packet was needed to meet average loan repayments. From 2013 to 2021, that figure was fairly stable in the low 30 per cent vicinity.

From then on, the chart has gone through the roof and without respite anywhere in the country. Housing affordability declined in all states and territories.

Renters have fared a little better of late.

The proportion of income required to meet median rents decreased slightly in the December quarter of 2024 to 24.7 per cent, a drop of 0.2 percentage points over the quarter. It does, however, remain 0.7 percentage points higher than the same period last year and has also deteriorated badly since 2020.

Leanne Pilkington, President, Real Estate Institute of Australia, said the decline in affordability can be attributed to larger mortgages required to purchase as dwelling prices increased.

“Offsetting this, in part, was an increase in the national median weekly family income of 0.9 per cent over the December quarter and 3.7 per cent over the past 12 months to $2,528.

“Interest rates remained largely unchanged over the December quarter ‑ the quarterly average standard variable interest rate remained stable at 8.8 per cent, and the quarterly average three‑year fixed rate decreased only 0.2 percentage points to 6.1 per cent.”

The manageability of mortgages declined across the board, ranging from 0.6 percentage points in Victoria, to 2.5 percentage points in Western Australia.

(Source: REIA)

First home buyers undeterred

Despite the drop in affordability, the number of first home buyers increased during the December quarter.

New loan commitments to first home buyers increased by 5.5 per cent compared to the previous quarter to 31,036, according to REIA. This was still1.3 per cent fewer than in the December quarter 2023.

The number of first home buyers increased in Victoria, Queensland, South Australia and the Northern Territory, but decreased in New South Wales, Western Australia, Tasmania and the Australian Capital Territory.

(Source: REIA)

Domain’s latest First Home Buyer Report has revealed that more Australian cities are facing mortgage stress than five years ago and highlights the challenges faced by a typical 24-35 year old couple on average wages, including entry-level house and unit prices and savings time.

In the combined capitals, affordability remains a struggle. Entry priced houses take up 47.1 per cent share of household income, while units require 30.7 per cent.

Darwin is the only city free of mortgage stress for entry-priced houses, with repayments taking up 27.7 per cent of household income. Perth is the next best city at 37.3 per cent, already above the 30 per cent threshold.

Sydney, Canberra, Melbourne, Brisbane, Adelaide and Hobart all exceed the benchmark for entry-priced houses. Sydney and Canberra are the most affected, with repayments for entry-priced houses consuming 57.6 per cent and 46.7 per cent of income, respectively. Brisbane and Adelaide also closely follow, with 46.4 per cent and 45.9 per cent.

(Source: Domain)

Domain’s Chief of Research and Economics, Dr Nicola Powell, said mortgage stress varies, with some cities, particularly for entry-level units, seeing improvements.

“The broader property market slowdown, easing prices and cash rate cuts points to gradual relief, however, lower cash rates can also boost borrowing power, potentially pushing prices up, especially with more rate cuts on the horizon.

“Ongoing challenges like housing undersupply remain, making it crucial to ensure adequate, affordable, and sustainable housing into the future.”

Ms Powell said the proportion of income needed for an entry-priced house across the combined capitals is 19 percentage points higher than five years ago, with units rising by about 8 percentage points.

“The aggressive rate hikes in 2022 and 2023 took a huge toll on mortgage serviceability, while soaring property prices over the past five years have pushed household debt to new highs.”

Affordability risks abound

Ms Pilkington said affordability usually improves with each rate cut; for every 0.25 per cent cut in interest rates, the proportion of family income required to service the average loan usually drops by around 1 percentage point.

“To end the year on a positive note there are signs that both housing and rental affordability will improve in 2025.

“The RBA cut rates by 0.25 per cent at its February meeting with further cuts expected during the year.

“For renters, recent improvements in vacancy rates should see a slowdown in rent increases.”

But the rate cuts may also contribute to a worsening of affordability if they lead to property price rises this year and into next.

Property prices nationally have already reversed a brief downturn period.

Matt Bell, Chief Economist, Oliver Hume, said the increase in the established market in February has flowed through to the land market, with enquiry up strongly across key markets.

“We are expecting increased sales volumes and rising prices across all land markets in 2025, particularly in the second half, as rate cuts work their way through household finances and balance sheets,” Mr Bell said.

“While February’s rate cut didn’t move the needle much on affordability directly, it is the expectation of further rate cuts that will be driving most of the increase in activity.”

The market now expects two or three cuts throughout the remainder of the calendar year, with the next coming at the May or July meeting.

“Our expectation remains for the high dwelling price growth experienced in Perth, Adelaide and Brisbane to ease, Sydney to remain about the same, and Melbourne to continue to move from falling prices to price growth.”