Australasia’s most affordable capital – Diwa Hopkins

Easing house price pressures are proving some affordability relief for home buyers according to the HIA. Joining us to talk about this, HIA economist Diwa Hopkins.   Diwa says the most affordable capital right now was the least affordable only a few years ago.  So what happened?
Kevin:  Easing house price pressures are proving some affordability relief for home buyers according to the HIA. Joining me to talk about this, HIA economist Diwa Hopkins.
Diwa, thanks for your time.
Diwa:  Thank you for having me.
Kevin:  Where are we seeing this? Is it right around Australia, or are there different patches?
Diwa:  We’re seeing affordability improve in most capital cities. The most affordable capital city at the moment is actually Perth, and so this is a very different story compared to what was happening quite a number of years ago right at the height of the resources boom.
But what you’re seeing in Perth now is a situation where the fallout of the downturn in the resources boom is actually leading to falling prices. By that token, that has improved affordability for home buyers. So, that’s the city that’s most affordable.
Kevin:  I’ll ask you in a moment how you do actually measure affordability, but let’s firstly talk about supply, because I imagine that’s something that the HIA would be monitoring fairly closely.
Diwa:  Yes.
Kevin:  How have you seen supply compared to demand?
Diwa:  Over the past couple of years, Australia has seen really strong levels of new home building, and this level of supply coming on to the market has been a response to very strong population growth that previously was unmet by commensurate levels of building. That supply has started to respond to underlying demand. In turn, that has taken the heat out of a lot of price pressures that were building up in the market.
Kevin:  Yes. Have you any evidence of a lot of stockpiling of sites by developers who have decided they want to pull back until the market does actually improve a bit or catch up?
Diwa:  We can look at the overall balance of the market by looking at both purchase prices and also rental prices to get an overall sense of how balanced the market is. I’d say in the major capital cities, particularly Sydney and Melbourne, we get an impression that these markets are pretty well balanced.
So, you have this situation whereby especially in Sydney, over the long term, you had a combination of strong dwelling price growth as well as rental prices, so that, to us, suggests that you have this persistent under supply and only more recently have dwelling prices been coming back, whereas rental prices, on the other hand, have retained a fairly steady pace of increase. So, to us, that suggests that you have a pretty even match between supply and demand.
Kevin:  I notice the affordability index, if it’s measured over the last 20 years, there are only a couple of capital city markets where the affordability index is actually lower than the 20-year average – those being Sydney, Melbourne, and Hobart. Overall, the average across all capital cities, the index is actually higher than the 20-year average.
Diwa:  Yes, that’s right. What stands out in particular is Perth and that’s that price story coming through there. But yes, you’re right. What we’re seeing particularly in Sydney and Melbourne, for example, where affordability is lower than its 20-year average, is the effect of the previous very strong house price growth, and so we’re only just pulling back from previous very strong price growth.
Kevin:  How do you measure affordability?
Diwa:  We look at house prices and what the associated mortgage repayments would be at the current interest rate settings. We look at the earnings of each of the capital cities, and we consider an affordable repayment to be 30% of earnings. If mortgage repayments exceed 30%, then the corresponding affordability reading will be a threshold of 100, so we set that index to equal 100.
Kevin:  The average across all the capital cities, according to your information, is 71.3. How does that measure? Is that acute or is it promising?
Diwa:  Critically, it’s below an index reading of 100, so it tells us that under current price settings and interest rate settings, mortgage repayments are amounting to more than 30% of an average wage.
Kevin:  I understand that, but there’s only one capital city in Australia where it’s actually over 100, and that’s Perth.
Diwa:  That’s right. So, that’s why we have this overall average across capital cities where the reading on average is less than 100.
Kevin:  How often is that 30% benchmark changed or altered? Or is it never altered?
Diwa:  No, it’s never altered. It’s an industry-wide rule of thumb.
Kevin:  A barometer.
Diwa:  That’s right.
Kevin:  I’ve been talking to Diwa Hopkins who is the HIA economist. Thank you very much for your time, Diwa.
Diwa:  Pleasure. Thanks for having me.

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