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Housing Affordability Deteriorates Sharply And Poses Risk To Outlook


Today the Sydney Morning Herald reported that average mortgage payments are now 42.8% of incomes in Australia, which is the highest since 1990, according to BetaShares modelling, and could put significant strain on spending. In Sydney it is even higher at 57.8%. Still elevated house prices with rising mortgage rates is impacting affordability significantly and could result in a sharper economic downturn than is currently expected.

  • The RBA’s cumulative 275bp of monetary policy tightening so far this year has impacted housing affordability significantly more than the 6.6% drop in house prices from their April 2022 peak has helped it, as house prices rose 25% from September 2020.
  • House prices to disposable income peaked in Q1 2022 but well below the 2003 peak. However, our housing affordability index (HAI) peaked in Q3 2020 at its highest since the series began in 1980 due to record low interest rates. It is now down 26.7% y/y.
  • The HAI began to decline before the RBA tightened because booming house prices resulted in deteriorating affordability. In Q2 2022, the quarter the RBA began tightening, the HAI fell below trend and is likely to continue to deteriorate into 2023.
  • The house price to CPI rents ratio is a good proxy for housing valuation. At the start of the year, it was showing that residential property was almost 20% overvalued. While that has moderated the latest data continues to show it is overvalued but with house prices falling and rents firming, that should correct to some extent.
Australia housing affordability % deviation from trend

Source: MNI - Market News/Refinitiv

Australia housing valuation %

Source: MNI - Market News/Refinitiv

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