Housing affordability on the rise.

The March Quarter edition of the Adelaide Bank/REIA Housing Affordability Report shows improvements in housing affordability in all states and territories when compared to the same quarter in 2013.

Commenting on the report’s findings, Damian Percy, General Manager of Adelaide Bank said: “The proportion of family income needed to meet home loan repayments has fallen from 30.8% to 30.6%. On the rental side, the proportion of family income needed to meet rent payments has increased slightly from 25.4% in the December quarter to 25.7% .

“The latest findings represent a 5% gap between rental payments and home loan repayments. We welcome an improvement in this quarter, but what of the future? Are we making it easy for people to ‘right-size’ their homes and are State planning policies and taxes such as stamp duty limiting their ability or inclination to do so?

“I think it’s important to keep the housing affordability debate rolling. How can we make it easier for people to more readily upsize and downsize without having to agonise about and plan for such a move over years instead of months?

“Encouraging home ownership should be a key priority for any home lender and Adelaide Bank is committed to working with REIA to contribute to the development of sound public policy that will help ease the supply side problems that put upward pressure on housing.

“Adelaide Bank’s continuing and widely recognised contribution to improving housing affordability is to keep the cost of lending as low as we can, while providing great service through Australia’s growing network of mortgage brokers” concluded Mr Percy.

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Housing affordability on the rise.

The Adelaide Bank/Real Estate Institute of Australia Housing Affordability Report for the September quarter 2013 recorded an improvement in housing affordability with the proportion of income required to meet loan repayments decreasing 1.2 percentage points to 29.8%.

Compared to the same quarter of the previous year, the figure fell 3.5 percentage points. All states and territories recorded improvements over the quarter with the largest improvement in affordability in Tasmania, where the proportion of income required to meet loan repayments dropped by 1.6 percentage points to 24.6%.

Damian Percy, General Manager of Adelaide Bank said: “The continued improvement in housing affordability is a welcome result for aspiring home owners. Low interest rates and modest rises in family incomes have combined with relatively stable average loan sizes in many parts of Australia to maintain the trend of the last three years”.

“Despite some of the headlines we see about frenzied auction bidding in the inner cities, for those prepared to look carefully and live in the middle and outer suburbs, there are still plenty of housing opportunities for people.

“This is particularly the case in the capital city apartment markets and for three bedroom houses in cities such as Brisbane, Adelaide, Canberra, Perth and Melbourne.

“Less pleasing and of genuine concern is the very low level of first home buyer activity over the most recent quarter. First home buyers remain a strong indicator of the underlying health of the Australian housing market . Their absence over recent months suggests that although affordability is improving, it needs to improve further.

“Improving housing affordability must remain the focus of both governments and industry participants. At Adelaide Bank, we understand that the best way a bank can contribute to improving housing affordability is to keep the cost of lending as low as possible.

“Adelaide Bank also believes in the value of good advice, which is why we partner with Australia’s growing network of professional mortgage brokers to offer great value home loans that can assist people into housing as cheaply as we can – and with as little stress as possible”, Mr Percy concluded.

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Unfortunately, Australia is also in the midst of a housing affordability crisis. For many, the dream of owning a home is fading. Rising interest rates and property prices act as gatekeepers to both the hopeful and the aspirational. 

As shown in the graph above, housing affordability has deteriorated in most capital cities and regional areas to within a doorbell of its lowest level ever, according to the latest Housing Industry Association (HIA) – Commonwealth Bank of Australia Affordability Report. Measured as an index combining interest rates, household incomes and home prices, Sydney remains the most unaffordable city, followed by Melbourne, Brisbane, Perth and Canberra. The HIA says mortgage repayments now account for 27% of total income, which is only marginally below the historical high of 28% seen at the beginning of 2008.

To try and get around this problem, first home buyers have sought cheaper housing in new areas on city fringes. And why not?  A number of state governments encourage it. In Victoria, first home buyers constructing new homes in the metropolitan area qualify for a $13,000 bonus, with new homes in regional areas attracting a $19,500 boost.

Nonetheless, with all this ‘financial support’, research shows that suburbs on city fringes are still moving out of reach of most first-home buyers. A study from the National Land Survey Program found that at the end of 2010, three out of 10 lots for sale in new housing estates were accessible to average-income first-home buyers. Not surprisingly, in Sydney only one out of 10 lots is sold under an industry-accepted affordable land benchmark of $200,000 a lot. The loss of affordability has been pronounced in Melbourne as well, with 26 percent of lot sales meeting the affordability benchmark, down from 90 percent two years.

Developers have repeatedly blamed soaring prices on dwindling land supply, calling for more rural land to be re-zoned for housing and faster planning processes for new estates. Residential land sales fell by 74 percent in the year to September 2010, yet median land prices grew by 25 percent to $225,750 in the year to December 2010, despite house blocks getting smaller. Poor affordability in Melbourne, south-east Queensland and Sydney could cause people to go to Perth, where new housing is somewhat cheaper and the job market better. Unfortunately, the challenge facing the development industry is to keep prices down and maintain a healthy number of homes accessible to first-time buyers.

Does this mean there is a looming bubble waiting to burst? Unlikely. One of the most plausible ways of dealing with the insatiable demand is to increase supply. However, this will take time and a lot of red tape no doubt. While no one is suggesting a permanent move to Perth be an interim solution, however, first-home buyers are encouraged to save for that deposit. First home buyers should also be made aware that there financial strategies available to achieve that goal.

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• The release of the building approvals and home price data is an opportune time to focus on the latest trends in the housing market. Dwelling approvals, new home sales and home prices all fell again in the
  latest month, raising hopes that the Reserve Bank will delay any rate hike for at least a month.
• Amongst the key trends: there are fresh doubts about the apparent under-supply of homes in Australia –in fact non-NSW housing approvals were at record highs in the year to August; Victoria is the clear leader in home building while NSW activity is again slipping back towards record lows; home prices have softened in response to a slowdown in demand for property; and buyers are switching from free-standing homes to units and townhouses in many states and territories.
• Exacerbating the decline in housing demand has been the shortsighted reduction in migrant numbers by the Federal Government. The slowdown in migrant inflows over the past year has been the biggest ever recorded.

Click here to download this document (pdf)

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• Finally one of the great myths has been debunked. The Reserve Bank has finally acknowledged that housing affordability is not a major problem in Australia. Neither is it worsening dramatically, or alternatively going through the floor. Actually it has been going sideways for the last 5-6 years.
• The Reserve Bank has come to the view (actually a view CommSec has held for some time, and which we reiterated a fortnight ago) by assessing more complete figures on home prices. In the past economists had compared capital city home prices to incomes. But clearly a more accurate measure is to compare home prices in every town and region of Australia with incomes across the country. That analysis is made possible by figures from RP Data and Rismark and reveals that affordability has been flat since 2004.
• Some investors will say ‘so what?’ – what is the importance of the findings? Well, foreigners have been particularly concerned by the potential for a ‘housing bubble’ in Australia. That risk has now been defused so foreign investors will have less concern about parking their funds in Australia. So the effects may show up in a firmer sharemarket, but also it may take away another factor restraining our dollar from going higher.
• That, in turn, raises another issue for investors: what can stop the Aussie dollar? The greenback is on the nose and foreign investors are embracing currencies such as the Euro, Aussie dollar and other commodity currencies. But here in Australia, arguably the fundamentals are far stronger than in other parts of the globe. Our government debt is amongst the lowest of advanced nations; the economy continues to grow, buoyed by the Chinese and Indian economies; and speculation has again turned to the prospect of higher interest rates.
• But why the speculation about rate hikes? Certainly any balanced assessment of the latest data suggests that a rate hike should be the furthest thing on RBA policymaker minds. It all boils down to a fear of the economy again bumping up against capacity limits, causing a re-run of the inflation spike that was witnessed in 2008.
• Australia has never been able to get this one right. When we are perceived to be reaching our productive capacity – and note that this is basically a guess – we always opt to constrain demand rather than increase supply. If we need more workers, migration needs to rise. And if we need more capital, the Government and RBA should be identifying where the problems are with the Government providing greater incentives to businesses.

The week ahead

• After a quiet start to the week, more than half a dozen important statistics will be released from Wednesday together with the Reserve Bank’s half-yearly assessment of the health of the financial system.
• On Wednesday the latest data on population growth is released. Meanwhile on Thursday, job vacancies, building approvals, new home sales, private sector credit (lending) and the RP Data/Rismark home price index are all slated for release. The Reserve Bank also issues the Financial Stability Review on Thursday. And on Friday the Performance of Manufacturing index is issued.
• Population growth had been running at the fastest pace in 40 years, but it is eased in the December quarter and likely eased further in the March quarter based on the latest long-term arrivals data. Still population growth near 2 per cent is both historically high as well as being close to the fastest rate for any developed economy. Here’s hoping the new government recognises the importance of maintaining the current population growth pace.
• Of the other data CommSec expects that job vacancies lifted in the three months to August but home prices, building approvals and home sales remained soft in August. And the high Aussie dollar probably ensured that the Performance of Manufacturing index was only modestly above the 50 line that separates expansion from contraction in September.
• Building approvals probably rose by around 3 per cent in August, after only posting the first gain in four months in July. With new home sales already at 19-month lows, it is clear that the short-term outlook for the new home construction market is decidedly weak. Further home prices may have lifted by 0.4 per cent in August, suggesting that annual growth eased further to more ‘normal’ level of 8.7 per cent from 9.7 per cent in July. And credit growth probably rose 0.2 per cent in August keeping the annual rate historically low near 2.9 per cent.
• The Reserve Bank is clearly contemplating an interest rate hike In October, but another batch of weak housing and credit market indicators may give it second thoughts.
• In the US, again the coming week gets off to a slow start before picking up pace as the week progresses. On Tuesday consumer confidence and the Case-Shiller home price index are issued. And the Chicago purchasing managers index and final June quarter GDP figures are released on Thursday. Meanwhile on ‘Fabulous Friday’, at least four key indicators are released – the ISM manufacturing index, auto sales, construction spending and personal income & spending.
• Economists tip only a modest improvement in consumer confidence In September, from 53.5 to 54.0. But an increase is still an increase and it should ease some doubts on the global economy. And GDP growth should be confirmed at a 1.6 per cent annual pace in the June quarter – no surprises there.
• There will probably be more mixed signals from Friday’s data. Economists tip a modest easing in the manufacturing index and construction spending. But auto sales, personal income and spending are expected to have advanced in the latest readings. Overall it is clear that the US expansion is still intact but the jury is unlikely to be convinced that recession may not return.
• It is also worth pointing out that most of the global purchasing manager indexes are released on Friday, and that together, they provide a good guide to global economic growth. Especially keep a watch on the PMI for China.
• Sharemarket
• In a fortnight’s time, Alcoa will kick off yet another profit-reporting season in the US. Alcoa’s earnings are due on October 7 and will be followed by the likes of Intel, JP Morgan, Google and General Electric in the following week.
• The good news is that earnings guidance has been favourable to date. Over the past 30 days more than 120 companies have issued earnings guidance with 47 per cent expecting earnings in line with previous guidance while 34 per cent have upgraded estimates and only 19 per cent believe that earnings will miss forecasts.

Interest rates, currencies & commodities

• Strangely, views about a rate hike in October have dramatically shifted. A week ago no economic group tipped an October rate hike but now all and sundry believe it will occur. So what data has provoked the change? Actually recent domestic figures have been decidedly soft. In the US the Federal Reserve is still debating whether it needs to provide additional stimulus. The only area of strength has been the latest batch of Chinese economic data.

• Certainly the Reserve Bank Governor delivered a speech this week and minutes of the last Reserve Bank Board meeting were released. No surprises in either – the Reserve Bank has never made a secret of the fact that it believes further rate hikes are necessary. There has been one other factor though – a prominent financial journalist has signalled that a rate hike in October is now likely. Given his impeccable track record, market economists believe there is little alternative but to flag the risk of an October move. CommSec doesn’t believe that the RBA should be lifting interest rates, but flags the risk of the RBA lifting rates anyway.

• Our currency strategists have markedly changed their forecasts for the Aussie dollar. They now believe that the Aussie dollar will end the year at US97 cents and that parity with the greenback is possible in the first quarter of 2011. However the Aussie is expected to ease to US94 cents in late 2011 as the US economy lifts.

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• One of the most poorly understood concepts in Australia is housing affordability. However to be fair, the main reason that it has been so poorly analysed and understood over time is because data has been either incomplete or inconsistent.
• For instance, in the past, data on property transactions tended to focus on capital cities – and for the simple reason that the data was more readily available. The problem is that 40 per cent of homes are outside capital cities. And, as you would expect, the price trends can differ markedly. Actually over the past year capital city house prices have risen by 9.7 per cent whereas regional house prices have risen by just 4.7 per cent.
• Then there has been the problem of comparing the property transaction data. If there was a big increase in sales of four-bedroom homes in one month, clearly that would skew price comparisons unless an adjustment occurred for the composition of sales.
• Fortunately the problem of incomplete or inconsistent home price data has been addressed. RP Data has collected figures on every property transaction in Australia. And, in conjunction with Rismark International, RP Data have adjusted price comparisons to account for compositional problems with their Hedonic Home Value index. This price index is now the primary home price index tracked by the Reserve Bank.
• And when you have data on every single property transaction and then compare that with disposable income across Australia, clearly you have an accurate measure of affordability.
• So how has housing affordability actually been faring? For Australia as a whole, home prices have broadly tracked incomes for the past four years. In other words, home affordability has been broadly stable.
• That doesn’t mean that affordable has been stable everywhere – it almost certainly hasn’t been. For instance Melbourne home prices have risen 16 per cent over the past year with Darwin prices up 15.6 per cent but Brisbane prices have lifted just 4.2 per cent. But what will tend to happen is that buyers will adjust their behaviour. Simply if a property becomes unaffordable in one area, then buyers will dry up, turn their attention elsewhere and prices will need to adjust.
• So the next time you read that housing affordability is continuing to worsen, or perhaps has hit the worst levels on record, ignore the report and move on.

The week ahead

• Generally economic data releases tend to get grouped together and thus follow a theme. Measures of inflation are released around the same time each quarter while labour market indicators tend to be released early in the month. But in the coming week there is no theme with a motley collection of statistics due for release.
• On Monday new figures on lending are released including Reserve Bank data on credit card lending. On Tuesday the NAB business survey is issued alongside the quarterly Crop Report from ABARE. On Wednesday consumer sentiment, car sales and dwelling starts will be released. And on Thursday Reserve Bank Assistant Governor Philip Lowe delivers a speech and the Reserve Bank quarterly Bulletin and imports data are issued.
• Consumers are super-conservative at present and that should be reflected in the latest credit card statistics as well as personal finance data. Still, despite their conservatism, consumers are happy enough. And that should be reflected in the consumer sentiment figures to be released on Wednesday. This will be the first survey undertaken after the election result was finalised.
• Generally business and consumer confidence move together. But the last reading showed a rise in consumer confidence and a fall in business confidence to 14-month lows. The August reading for business confidence should show a modest improvement despite the on-going fluky business conditions.
• Adding to the mix of patchy economic results will be figures on dwelling starts and car sales. We expect that car sales fell for the seventh time in eight months, down 1.5 per cent in August. While the car market is reasonably healthy, the hangover effects of last year’s Government stimulus is still being felt. And dwelling starts were probably flat in the June quarter. Given the sharp fall in approvals, the likelihood is that starts have now peaked and will ease over the next six months.
• In the US, investors will need to dissect a bevy of top shelf indicators. On Tuesday retail sales data is released with industrial production on Wednesday, producer prices and the current account on Thursday and consumer prices and consumer confidence on Friday.
• The main attention will be focussed on retail sales and production. Economists believe that retail sales rose by around 0.3 per cent in August after a 0.4 per cent lift in July. And excluding car sales, again retail sales are expected to have gained 0.3 per cent. Given the weak position of the job market, the growth in retail spending is certainly good, but you wouldn’t describe it as great.
• Economists also believe that industrial production edged 0.2 per cent higher in August after a solid 1.0 per cent gain in July. When combined with the expected result on retail sales, the data would hardly be indicative of an economy slipping back into recession.
• The other event of importance for investors occurs on Monday with the release of the latest Chinese economic indicators, including retail sales, production, inflation and investment.

Sharemarket

• Investors hoping for political certainty would clearly be disappointed by the election result. Framing of legislation is likely to prove difficult under the so-called “rainbow coalition” of Labor, Greens and three independents. And there are key issues that will have to be navigated over the coming year including the National Broadband Network, mineral resource rent tax, broader tax reform measures and devising a price for carbon.
• However in practical terms it means that analysts and investors will not be able to factor future legislative changes into valuations. The upshot is that current and perspective business conditions, together with company-specific factors and strategies, will continue to shoulder the burden of setting share prices.

Interest rates, currencies & commodities

• Currently there is a major disconnect between financial market views on interest rates and the views of market economists. The overnight indexed swap market is factoring in a 25 basis point rise in the cash rate in a year’s time. And 90-day bank bill futures are similarly assuming that yields will be around 25 basis points higher by the end of 2011. By contrast only one of 22 economists polled by Reuters expects a 25 basis point rate hike by the end of 2011 – all other economists tip bigger rate increases. Three of the economists expect cash to reach 6.00 per cent, with another three tipping 5.75 per cent and the remaining forecasts are between 5.00-5.50 per cent.
• The latest coal and iron ore price negotiations serve are a wake-up call for those investors that assumed that commodity prices would continue to rise or remain at lofty levels almost indefinitely. Platts reported that the BHP Mitsubishi Alliance settled premium hard coking coal contracts with Japanese steelmakers at US$209 a tonne for the December quarter, down 7.1 per cent from US$225/t in September. And Rio Tinto has agreed with Japanese steel makers to reduce its iron ore price for the December quarter by around 13 per cent.
• The current spot iron ore price is around US$142 a tonne. CBAs chief resources analyst Andrew Hines expects contract prices to ease to around US$119 a tonne in 2011, US$107 in 2012 and US$92 in 2013. However he notes that, with not a lot of new iron ore supply hitting the market in the next 12 months, there is an upside risk for prices.

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