The recently published ANZ-CoreLogic Housing Affordability Report shows how housing affordability and Reserve Bank announcements are linked. Despite being released in June, prior to the Reserve’s announcement that they were dropping the official cash rate to 1.00%, data published in the report signifies how housing affordability is a crucial driver of monetary policy.
According to the report, factors that have eroded housing affordability in Australia include interest rates and inflation, along with financial deregulation. However, the report notes that housing affordability is at its best since 2016, and this improvement signifies an increase in the economic outlook for Australia.
Let’s look at the connection between historical interest rates and inflation over the last 30-years, and how this relates to home buying and property prices in Australia before moving on to the impact of financial deregulation.
Declining interest rates and inflation
Historically speaking, when interest rates rise, so too does inflation, and vice versa. For instance, in January 1990, the cash rate sat at a staggering 17.00%, and inflation averaged 7.00%. By January 1992, the cash rate had fallen to 7.50%, and by July 1994 it hovered around 4.75%. Inflation had also declined to just 2% by March 1992.
In 1993 the RBA introduced a 2-3% inflation target, so inflation remains consistent. Since this date, Australian inflation has averaged 2.5%.
Other notable changes in both interest and inflation rates occurred in:
- September 2000: The introduction of the Goods and Services Tax (GST) saw inflation rise, and coincidentally, so did the cash rate to 5.50%.
- April 2000: The official cash rate sat at just 3.00%, and inflation at 1.2%, their lowest rates ever.
- August 2013: The official cash rate dropped to just 2.50%, while inflation remained around 1-2%.
Since then, the official cash rate has steadily declined to its current historic low of 1.00%, and inflation sits at 1.3%.
So, how do interest and inflation rates affect housing affordability?
Well, typically when interest and inflation rates decrease, buying a home becomes more affordable because the cost of making home loan repayments decreases along with the cost of living, meaning that households have higher disposable income.
However, when looking at housing, it’s also important to consider how home prices have increased since the 1990s.
The ANZ CoreLogic Housing Affordability report findings
The ANZ CoreLogic Housing Affordability Report released in June 2019 measures housing affordability by looking at the ratio of dwelling values to annual household incomes, the number of years that it takes to save the required 20% deposit to secure a mortgage, and the proportion of income needed to service an 80% loan-to-value-ratio mortgage. Given this, the rise in housing affordability in the report is linked directly to the decline in home values as of December 2018 as compared to the same time in 2017.
According to the report, the national dwelling value to income ratio fell from 7.0 in December 2017 to 6.7 in December 2018. The report also noted that the higher the decrease in dwelling values, then the more significant the fall in the ratio and that further affordability would result as Australian home values continued to drop.
The time taken to save the needed 20% deposit to secure a mortgage, based on report data, had also fallen from 9.3 years to 8.9 years. Plus, the report indicated that the repayment of an 80% LVR home loan required 36.1% of the average Australian household income in December 2018. This figure was 18.1% less than the peak, in March 2008, where Australian households were dedicating 54.2% of their income to servicing their mortgage.
So, how does deregulation link to housing affordability?
Financial deregulation and housing affordability
Deregulation of financial markets gave rise to a far more competitive lending sector, and this resulted in increased investment, which pushed up housing demand and home prices. While some critics argue that deregulation led to the Reserve Bank’s official cash rate changes having little impact, other economists will suggest that deregulation has led to far greater competition in the market and a fairer lending pricing structure.
Financial deregulation in Australia began in the early 70s and adjusts to meet changing needs. These changes, and lower inflation and interest rates have enabled the supply of credit to increase, which, in turn, has supported the need for households to purchase housing stock.
What’s the future of housing affordability?
Housing market experts suggest that the national market will decrease marginally in the closing months of 2019, before stabilising in 2020. Sydney, Brisbane and Canberra are expected to experience a change of between 3-6%. Markets such as Adelaide, Perth and Hobart will experience marginal differences between 0-4%.
The reasoning behind this prediction is directly associated with the Reserve Bank’s interest rate cut last month. Further rate cuts are predicted before the close of 2019 if unemployment continues to rise.
The RBA has indicated that lowering the official cash rate would support households with considerable debt and also stimulate employment. The Reserve also noted that the risk of lower interest rates stimulating investor housing market activity was marginal given that household debt was high, and lenders had tightened up their lending criteria after the royal commission enquiry.