| |
Latest RBA rate rise will kill housing stone dead
Even with the price correction in the first quarter this year the RBA's latest rate hike would make the average Australian house the least affordable since our records began. The graph at the right applies the new interest rate pushing the index up to 174.3.
This is bad news for first home buyers who are very unlikely to buy at the moment, and to existing home owners wishing to trade-up or -out.
The AIP Housing Affordability Index suggests that when the institute’s repayment affordability index hits a figure around 160* buyers will not be able to participate in the market. Over the last 28 years the index has peaked at 172.2 in 2008, 155.57 in 2011, and 159 in 2021. As per our media release of yesterday, affordability is unlikely to be restored by relaxing interest rates, as it was post-GFC. It would also be calamitous for the economy if it were restored by a rapid plunge in median house prices. With the current mix of incomes and interest rates, median housing prices would need to be 33% lower before the market found a floor. This would put many borrowers into a situation of negative equity and dint consumer confidence in all home-owners.
At some stage the RBA may reduce interest rates, but at 2.35% rates are well-below historical norms which tend to be above 4%, as well as being too low for its inflation target of 2-3%, so its long term trend has to be upward, not downward.
This suggests that the only way out will be for a long period of wage increases coupled with stagnation in house prices. But how likely is this when supply does not currently match demand, and Australia is about to restart an historically high immigration program, while construction resources are diverted to road and power infrastructure?
The federal government will be likely to get the blame for the lack of affordability even though the RBA's monetary policy along with state government planning laws and practices which limit supply and competition, are the real culprits.
But both culprits are snookered after having allowed an over-priced market to develop.
For further information contact Graham Young on 0411 104 801 or graham.young@aip.asn.au *The index is calculated from a combination of house prices, average earnings and interest rates. A rise in rates or prices will decrease affordability, while a decrease in average earnings would have the same effect. Affordability increases when prices and rates decrease, or average earnings increase.
|
|
