House prices across the nation continue to decline due to Australia’s record home-building boom, according to the Housing Industry Association (HIA).

The HIA Affordability Index for capital cities reached 75.4 in the December quarter, up by 1.5% from the previous quarter and 3.3% year over year.

Five of the eight capital cities recorded improved affordability. While Perth is at its most affordable in over two decades, Sydney continues to post the greatest improvements, with affordability up by 11.3%. This was followed by Melbourne (+5.9%), Perth (+5.7%), Darwin (+3.2%) and Brisbane (+0.8%). Affordability in Hobart (-9.3%), Canberra (-3.6%) and Adelaide (-3.3%), meanwhile, decreased.

“2018 was the fifth consecutive year where the industry commenced construction of over 200,000 homes, and it was a record year in terms of new dwelling completions. This strong flow of new housing supply is one of the key factors behind the moderation in price pressures in housing markets across the country, which has ultimately improved housing affordability,” said Geordan Murray, HIA senior economist.

HIA found that the other key reason for the drop in values has been the modest improvement in wages growth. Robust growth in employment over the last two years has caused the demand for workers to increase, and early indicators show that the tightening in the labour market is translating into rising wages.

“The combination of declining home prices, growth in wages and historically low interest rates create a situation where the HIA Affordability Index shows that affordability in six of the eight capital cities is more favourable than the 20-year average. Melbourne and Hobart are the only exceptions,” Murray said.

Housing in Sydney and Melbourne bucked the downward trend of prices, remaining far from affordable for average households.  Wage growth needs to continue outperforming home prices for the latter to moderate, according to Murray.