Affordability improves, but don’t expect the market to bounce back soon

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In welcome news for investors who are banking on improved sales activity in the property market, the nation’s level of housing affordability has improved once again. But some states fared better than others, and a dramatic Aussie real estate comeback may still be some way off.

According to the recently released HIA-Commonwealth Bank Housing Affordability Index for the March quarter of this year, housing affordability has now improved for five quarters in a row.

The Index improved by 6.4% in the March 2012 quarter to be 11% higher over the year and, while the news has been welcomed by Housing Industry Association (HIA) senior economist, Andrew Harvey, he warns that dramatic improvements are far from guaranteed.

“Those trying to get a foothold into the housing market will welcome the recent improvement in affordability, and we should see further improvement in coming quarters as the May rate cut flows through,” he said.

“However, we should be mindful that much of the recent improvement in affordability is driven by a cyclical softening in the economy and in house prices. Structural issues which dramatically push up the cost of housing, including high taxes, still need to be addressed and reformed.”

What has driven the improvement in housing affordability during the first quarter of the year, he said, is a modest increase in earnings, a modest decline in lending rates and a softening in the median dwelling price.

The RBA’s interest rate cuts have also helped the affordability cause, but its effect has been dampened by the banks’ stubborn refusal to pass on the cuts in full to borrowers.

“Cuts to the RBA cash rate totalling 50 basis points in late 2011 should have provided a much larger boost to affordability in the quarter but the impact was eroded as lenders widened the margin between mortgage rates and the cash rate,” said Harvey.

“After accounting for the wider margins, the average mortgage rate during the March quarter was only 13 basis points lower than in the December quarter.”

Regional differences

Melbourne and Hobart both saw their affordability scores improve by 7.3%, followed by Canberra (7.1%), Brisbane (6.3%) and Hobart (3%).

Sydney and Perth, however, actually saw their affordability levels decrease by 1% and 1.8% respectively.

Outside of the major cities, regional Western Australia was the big mover, with an affordability score rise of 8.7%. South Australia’s score improved by 6.4%, followed by Queensland (4.5%), NSW (2.4% and Tasmania (0.4%). Victoria’s score remained unchanged.

Source: HIA-Commonwealth Bank Housing Affordability Index

Source: HIA-Commonwealth Bank Housing Affordability Index

Are you struggling with affordability? Place your comments below, or join the debate on our property investment forum.

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