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Australian home loan affordability at its lowest since 2016

By Noemi Pamintuan-jara 27 October 2021 | 1 minute read

With house prices continuing to soar, home loan affordability significantly dropped.

Australian home loan affordability

This was revealed by Bluestone’s Home Loan Affordability Index for August 2021, which showed that the index has risen above the long-term average, a sign of persistent growth in house prices as home loans continue to drop.

The Home Loan Affordability Index, with data derived from the Australian Bureau of Statistics (ABS), is a measurement of the proportion of average income required for the average home loan repayment.

The higher the index number, the higher the proportion of average income required for the average home loan and the lower the affordability.

“Recent strong house price growth has resulted in buyers having to borrow more and, with subdued income growth and flat interest rates, this has resulted in a higher proportion of income required for loan repayments,” Dr Andrew Wilson, consultant economist for Bluestone Home Loans, explained.

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APRA’s stricter lending restrictions detrimental to borrowers outside Sydney and Melbourne

In a property market round-up in early October, we gave an overview of the recent Australian Prudential Regulation Authority (APRA) restrictions’ impact on investors and first home buyers.

Dr Wilson’s opinion aligned with the overview that APRA’s tighter borrowing condition will “place a ceiling on borrowing capacity for buyers which results in reduced demand and lower price growth”.

Specifically, APRA’s blanket restrictions will adversely affect borrowers outside Sydney and Melbourne.

The upswing of house prices in the capital cities of NSW and Victoria placed them on the top of the list as least affordable when it comes to home loans, with NSW’s index rising to 20.1 per cent year-on-year and Victoria at an average of 14.4 per cent.

However, other states have recorded lower than the national average index of 14.4 per cent; thus, APRA’s latest borrowing restrictions could be a barrier for the entry of first home buyers from other states into the housing market.

“The national average of home loan affordability is masking significant differences between states. As a result, APRA’s recent decision to impose tighter lending restrictions will penalise home borrowers outside Sydney and Melbourne,” Dr Wilson commented.

Property market will self-correct

Data from ABS reported that owner-occupier home loans were down 4.2 per cent in August, the lowest monthly level since November 2020.

When it comes to first-time home buyer loans, it was evident that borrowers are finding it difficult to keep up with the rapid rise in prices as first-time home buyer loans went down by 3 per cent, the lowest since July 2020.

“Housing markets have clearly been self-correcting recently as higher prices reduced affordability and side-lined buyers. Price growth rates have halved over the past three months, and housing loans have also declined over each of the past three months,” Dr Wilson said.

Despite the fact that sharply falling loan activity can be attributed to extended lockdowns in several states, lending activity has now fallen for three months in a row to the lowest level for 2021 and has seasonally adjusted.

Moreover, the average loan value approved for owner-occupiers dropped to 2.5 per cent and 2 per cent for first-time home buyers.

Investor activity expected to increase

The Bluestone report noted that even the rolling lockdowns didn’t dampen investor lending, which is on the rise, recording a 1.5 per cent increase in August, the tenth month in a row it experienced growth. This is the highest value of investor lending recorded since April 2015 and the second-highest on record.

Dr Wilson predicted continued growth for the investor market evidenced by below the long-term average of investor market share of total residential lending. The strong price growth will make it enticing for investors to fuel investor activity, even with the APRA restrictions.

“The latest APRA restrictions are unlikely to slow down investors that rely on different income models from owner-occupiers – particularly reflective of rental income. With tight home rental markets generally placing upward pressure on rents, this will provide increased income for investors, offsetting the new lending restrictions.”

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Australian home loan affordability at its lowest since 2016
Australian home loan affordability
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