The affordability flaw
MARIKA DOBBIN
May 24, 2010
This time last year, houses were at their most affordable in eight years, but things are different now: affordability in Melbourne has crashed.
A SHEET of paper posted outside a shop in Victoria Street, Abbotsford, says a lot about the housing market.
''I buy houses and pay $20,000 more,'' it reads.
The words, scrawled and underlined in black texta, speak to the edge of
panic about rising prices that has pushed buyers to extremes in the past year.
Affordability in Melbourne's housing market has crashed in spectacular fashion, according to the HIA-CBA First Home Buyer Affordability Report last week.
Although in the first quarter of 2009, houses were at their most affordable in eight years, things are very different this time around.
Melbourne led a national deterioration in affordability in the March quarter, with a 16 per cent decline in just three months and a 33 per cent drop overall since last year's purple patch for buyers. The index is calculated by taking into account house prices, interest rates and factors such as the removal of the first home buyers boost.
Senior economist Ben Phillips said
further interest rate rises in April and May would probably mean affordability would plummet further in the June quarter, to match the record lows seen in 2007 when interest rates were above 9 per cent.
''Housing affordability will once again be a key issue in the mortgage-belt regions of Australia,'' he said.
''We are yet to see the required level of co-operation between all levels of government to deliver critical housing infrastructure.''
Making things worse for first home buyers is that most of Australia's lenders show no signs of easing strict criteria that have made it difficult to get a sizeable loan.
As prices have gone up, so have loan-to-value ratios.
The loan-to-value ratio refers to the amount of money borrowed for a property compared to what the property is worth. For example, if a property is valued at $300,000 and a buyer borrows $270,000, the ratio is 90 per cent.
Adjustments to maximum ratios are one of the main devices financial institutions use to increase or decrease the amount they lend, alongside interest rates and fees.
In May, there were 31 less loans available of, or above, a 95 per cent loan-to-value ratio than in February, according to financial comparison website RateCity.
But it is not just in the mortgage belt that the high expense of housing is making life difficult. The ripples extend far and wide, even to those outside the market.
Victorian Housing Minister Richard Wynne last week was called before a public accounts and estimates committee to explain why the wait-list for public housing blew out to almost 40,000 people in March, having increased by 1013 in just three months.
There are now almost as many people waiting for government accommodation as there were in 1999, at the end of the Kennett government era.
Mr Wynne told the hearing that for the past few years the private rental market was the tightest the state had seen.
''And whilst the market has eased a little bit … there's a direct correlation between vacancies in the private rental market and the public housing waiting list,'' he said.
Mr Wynne said government interventions, including the expected delivery of 3800 new dwellings under federal social housing and economic stimulus money, and thousands more affordable rental properties thanks to the National Rental Affordability Scheme, would make a difference to supply.
Whether or not those goals are realised, conditions for those at the margins do not appear likely to improve any time soon.
However, it is not all bad news.
There are signs that Melbourne's property market may become a friendlier place for some buyers as winter approaches.
Auction clearance rates before Anzac Day were as high as 87 per cent, but have tapered off slightly since then. Last weekend it was 75 per cent, the lowest since the opening auction weekend of 2009 on March 21, according to the Real Estate Institute of Victoria.
Sales results have been the most patchy at the very top, a price segment that set the market on fire with a series of record-breaking results late last year.
Of course, there is no point mentioning clearance rates without taking into account the level of stock, and May is set to become the busiest auction month on record outside of the traditional spring selling season.
But even when the extra listings are taken into account, it seems clear that higher interest rates have finally tempered demand and will eventually slow price growth in other market sectors.
REIV communications manager Robert Larocca says the auction market at the moment has shades of autumn 2008, when vendors' confidence was still soaring from the 2007 price peak and listings were unseasonably high.
''Interest rates started to escalate and clearance rates dropped to the mid-60s,'' he says. ''This autumn, many of those same factors are in play but we haven't seen quite the same reaction. The market certainly has not crashed.''
Although affordability is yet to improve, it seems the market might finally be shifting back towards buyers, and sellers' reserves are not as likely to be exceeded as they were prior to Anzac Day.
In that context, a sign on the street offering $20,000 more than market value for houses appears even more out of place.
For the record, this columnist called the number on Friday, and was told that ''Sue'' would phone back. She hasn't yet.
Source: The Age
http://www.watoday.com.au/business/property/the-affordability-flaw-20100523-w41c.html
