According to a new report, the income required to service new mortgages on average dwelling values has increased year-on-year. The ANZ CoreLogic Housing Affordability Report found that as of September 2023, prospective home buyers must dedicate 46.2% of their income to service a new loan on the average dwelling, up from 40.3% during the same period last year.
This is an increase from the low of 29% during March 2020, when the official cash rate was at 0.1% in response to the pandemic. However, despite this deterioration in mortgage serviceability, the portion of income required to service a new loan still sits slightly below the series high of 47.3% recorded during March 2008.
The report also found that reduced borrowing capacity may worsen unequal access to home ownership, as rising interest rates create a market where low-income/wealthy households may need help to compete for housing.
According to the Australian Prudential and Regulation Authority (APRA), the portion of new loans secured with a 20% or less deposit was 35.9% during the March quarter of 2022, falling to 29.3% as of June 2023 (just over a year after interest rates began to increase). Additionally, the time to save a 20% deposit has risen to 10 years nationally and to 12.6 years in Sydney, which also requires a “record” 58.1% of income to service a new loan.
Regional Areas Have Also Been Impacted
Affordability in regional Australia has also dwindled, with purchase values increasing more than capital city markets since the start of the pandemic, highlighting that these areas are no longer an affordable alternative. CoreLogic head of research Eliza Owen said that the COVID-boom in regional migration and values has resulted in “very little difference in the combined regional and capital city metrics”. “In 2024, housing affordability is likely to worsen before it gets better,” Owen added.
“Dwelling supply will continue to be strained by the high-interest rate environment, which has reduced approvals and potential for new housing development in 2024. Demand will probably be the only thing that can adjust in the short term so that we may see average people per household rise.”
The Outlook For 2024
With ANZ Research’s interest rate outlook being that the recent November rate hike marked the last in this tightening cycle, which is predicted to be followed by an extended pause, existing owners will be exposed to the peak cash rate throughout most of 2024. According to ANZ, a modest decline in interest rates will help take the pressure off mortgage serviceability.
However, a substantial reduction in mortgage rates would be needed to bring the portion of mortgage payments to household income “down to comfortable levels”. Mortgage rates need to drop 146 basis points to bring serviceability down to 40% of revenue and 410 basis points down to 30% of income (assuming that income and median dwelling values hold firm).
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