The affordability of servicing mortgages on Australian homes reached its worst level in more than a decade during the March quarter, new data shows.

And further interest rate rises in May and June mean that affordability has almost certainly deteriorated since then.

Last week, the Housing Industry Association (HIA) released the latest quarterly edition of its Affordability report, which measures the affordability of servicing household mortgages across all eight capital cities as well as regional areas.

According to the report, the HIA Affordability Index fell from 63.3 in the December quarter to 62.6 in the March quarter.

At this level, affordability at its worst on record since 2008, when dwelling prices had reached their peak on the back of the mining boom and official interest rates had reached as high as 7.25 percent.

Furthermore, affordability is well below the 100.0 mark at or above which mortgages are considered to be affordable.

Indeed, it now takes 1.6 average incomes to service average mortgage repayments in an affordable manner.

This is well up from the 1.2 average incomes that were needed to affordably service average mortgages in 2019.

(Housing is generally considered to be affordable in Australia when payments in respect of either mortgages or rents are at or below 30 percent of household income. Beyond that level, households are considered to be in a state of housing stress.)

Not surprisingly, the deterioration in affordability is being driven by the surge in official interest rates, which have gone from 0.1 percent in April 2022 to 4.1 percent in June.

Despite a fall in the median value of homes, this has pushed the monthly mortgage repayment on a median priced home up from $3,417 or 36.9 percent of average household income in the March quarter of 2022 to $4,151 or 47.5 percent of average household income in the March quarter just passed.

This is well above the 30.0 percent of income beyond which households are deemed to be in housing stress as mentioned above.

Moreover, the data relates to the March quarter and does not reflect the two most recent rate increase in May and June.

As a result, the current affordability situation is likely to be even worse than this data suggests.

The latest data comes amid growing concern around Australia about the impact of a mortgage cliff, whereby a large number of households who have been on (low) fixed interest rates over recent years will see their fixed term periods expire and will face higher mortgage repayments as they are moved onto the current variable rate.

In a recent article in the Australian Financial Review, Sebastian Watkins, chief operating officer of online mortgage broker Lendi, says that almost half (48 percent) of the loans on Lendi’s books are fixed-rate loans that will roll onto more expensive variable rates over the second half of this year.

Watkins says the impact of this will likely be felt from the end of this month onward.

In a statement, HIA Deputy Managing Director for Policy and Industry, Jocelyn Martin, called for action on several fronts.

These include not only passing the Housing Australia Future Fund which is currently before Parliament but also additional measures to unblock new housing supply.

“Housing affordability poses a major challenge across the country, and the issue is paramount on the policy agenda of all levels of government,” Martin said.

“It is crucial to identify policies that would work and those that would not, and it begins with a supply-and-demand balance.

“Rising interest rates are only a part of the story. Housing affordability simply gets worse when housing supply falls short of demand.

“This makes measures that do not increase the number of homes, such as convoluted planning processes and the heavy burden of taxation, likely to fail. The Australian Government has spoken widely about a plan to pass legislation, ‘The Housing Australia’s Future Fund Bill 2023’, which aims to improve the quality of housing data, improve forecasting of housing demand, and collaborate with states and territories to improve the supply of housing.

“This legislation has been held up in Federal Parliament over the mechanism to fund investment in public housing, and this is delaying changes to policy that will begin to address the failures that are constraining an improvement in the supply of new homes.

“In addition to the passage of this legislation through Parliament, there is also a need to reform state government taxes that have forced foreign investors out of the market. The impact of these taxes has seen foreign investors withdraw from the Australian market and consequently the number of apartments commencing construction fell to barely more than a third of its peak in 2016. Foreign investors do not force up house prices because they cannot buy existing homes. They can only buy new homes and improve the supply of rental accommodation and ease this shortage.

“A large investment by state and federal governments in public housing stock isn’t going to be sufficient to increase the supply of new homes to meet demand. The HAFF Bill 2023 isn’t going to solve the acute rental shortage this year, but it does begin a pathway to accountability for each tier of government and will assist in restoring balance.”

In terms of locations, the report says that Perth is the most affordable market whilst Sydney is the least affordable market.

However, average mortgage repayments exceed 30 percent of average household incomes in every capital.

Across capital city markets, the report says that average wait times for first-home buyers to secure a deposit on a median priced home stand at 7.5 years.

This is down compared with the peak in 2022 but well up from 5.0 years which was recorded 25 years ago in March 1998.

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