Dramatic drop in home affordability is speeding up, study reveals

Bluestone reported that the rapid rise in property prices has increased the average loan size required by buyers and has resulted in the national home loan affordability falling by 15.6 per cent in the last year.

In the September quarter, the index overtook the long-term average of 86.9 per cent, rising to 91.76 per cent, which is an increase from the 90.80 the previous quarter.

The Bluestone Home Loan Affordability Index is based on Australian Bureau of Statistics (ABS) data and evaluates the fraction of average income necessary for typical home loan repayment. Higher index numbers correspond to a greater proportion of the average income required for the average home loan.

“The index is a robust forward indicator of home loan activity and house price movements: the higher the index, the more likely we are to see house price growth easing and a fall in the number of home loans approved. We’re already starting to see this with 84,998 loans approved in the September quarter, down from 87,932 in the August quarter,” Bluestone Home Loans’ consultant economist Dr Andrew Wilson explained.

As the index breached the long-term average of 86.9 per cent for four consecutive quarters and is continuing to outperform the previous above-average results from 2016, what are its implications on the property market?

“Recent strong house price growth has resulted in buyers having to borrow more and, with subdued wages growth and flat interest rates, this has resulted in a higher proportion of incomes required for loan repayments. Stricter lending conditions from financial institutions also place a ceiling on borrowing capacity for buyers which results in reduced demand and lower prices growth,” Dr Wilson opined.

States that experienced the highest decreases in home loan affordability are NSW, with a yearly reduction of 20.6 per cent, and Victoria, with a 17.4 per cent decrease. These figures mirror the recent uplift of house price prices in Sydney and Melbourne.

When it comes to home loan relative unaffordability, NSW is leading the pack at 27.1 per cent higher than the national result evaluated as a 100 base for the September quarter.

In contrast with the steep decrease in these capital cities, home loan affordability in the ACT increased by 1.1 per cent in the September quarter.

Weighing in on the expected housing market revival post-lockdown vis-à-vis wages and house price growth, Dr Wilson opined: “With national home loan activity set to revive as lockdown restrictions end in Sydney and Melbourne, rising house prices and flat incomes will continue to reduce affordability and sideline home buyers.”