Outlook for home loan affordability improves, says Bluestone Home Loans

Index shows property prices will ease

Outlook for home loan affordability improves, says Bluestone Home Loans

After three consecutive months of declines, home loan affordability has levelled out, the latest data from Bluestone Home Loans shows.

Releasing its home loan affordability index, which uses ABS statistics to measure the proportion of the average income required to service the average home loan repayment, the Sydney-based non-bank lender said Australians’ ability to afford a home loan steadied in the February quarter.

A forward indicator of home loan activity and house price movements, for the last six months, the affordability index indicated that runaway affordability was set to plateau.

The affordability index came in at 96.6 in February - the same as the January quarter.  Bluestone Home Loans said higher index numbers indicated a higher portion of the average level of income was required to service the average home loan, reflecting lower affordability.

Over nine-consecutive rolling quarters, the affordability index continued to track above the long-term average of 87.1, Bluestone Home Loans said.  At a national level, the current annual decline in affordability of 17% was the highest since January 2010, when reporting began.

An above-average affordability index level indicated house price growth was likely to continue to ease, and home loan activity would decline.

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Strong price growth over 2021 and early 2022 required buyers to borrow more. Subdued income growth and flat interest rates resulted in a higher portion of buyer incomes required for loan repayments, Bluestone Home Loans said.

Stricter lending conditions limit borrowing capacity, resulting in reduced demand and lower price growth.

Bluestone Home Loans consultant economist Dr Andrew Wilson (pictured) said the property market in Australia had finally “hit the wall” in terms of affordability.

“Without higher incomes or lower interest rates to drive prices higher, the house price boom is over.  Wages growth remains stubbornly low and last week, the RBA finally signalled the prospect of rising interest rates,” Wilson said.

Disruptions arising from COVID-19 restrictions, including lockdowns, muddied the waters in late 2021. With pent-up demand now largely satisfied, Wilson said the dynamics of the housing market were now “returning to normal”. 

“The fundamental drivers of the market are record prices impacting affordability, subdued income growth, lengthy holiday and election distractions, stricter lending conditions from financial institutions and the prospect of increasing interest rates. These all combine to sideline buyers and result in reduced demand and lower prices growth,” Wilson said.

“However, fears of a housing market crash are completely overdone. The easing of COVID restrictions and concerns, a reviving national economy, the imminent return of mass migration and the significant stimulus policies introduced for first home buyers in the Budget will support solid home lending through 2022.”

While interest rate rises feature prominently in news headlines, Wilson said there was no reason for homeowners to panic: low unemployment (currently 4%), a near-record household savings rate and high levels of equity following the house price boom meant few Australians were likely to experience mortgage stress.

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Affordability by state

According to the Bluestone Home Loans Affordability Index, over the last 12 months, NSW and Victoria were the least affordable states.

“NSW remains the clear state leader in home loan relative unaffordability, reflecting the high-priced Sydney housing market – still 27.6% higher than the national result, measured as a 100 base over the February quarter,” Bluestone Home Loans said.

The change in affordability index by state over the February quarter was as follows (a higher value indicates lower affordability):

  • NSW: -0.2% (21.4% annual change)
  • Victoria: 0.3% (17.7% annual change)
  • Queensland: 0.3% (13.7% annual change)
  • South Australia at 1.2% (11.2% annual change)
  • Western Australia at 2% (5.8% annual change)
  • Tasmania at -0.5% (10.1% annual change)
  • Northern Territory at -0.2% (1.6% annual change)
  • ACT at 2.7% (13.8% annual change)
  • Nationally 0% (17% annual change).