Richard Livingston I Sydney Morning Herald I December 6, 2013
If you’re reading this article you can probably speak English. So if I ask the question “is property affordable?” you’ll have an opinion, or quickly form one.
Unfortunately for the property industry – those who make money building or selling houses – in the past decade or so more and more people have come to the conclusion that the numbers on residential property just do not stack up.
Those who might have bought a home are choosing to rent – or make do with the bare minimum – and many investors are choosing to pass. On most metrics, and in plain English, residential property has become unaffordable.
But using prices and incomes as a measure of affordability just will not cut it when there’s property to be sold. Enter the HIA-Commonwealth Bank Housing Affordability Index, recently published for the September quarter.
“Hang on a minute,” you say, “haven’t I been reading about rising house prices and a lack of first home buyers? Property can’t be affordable and unaffordable at the same time. What gives?”
What gives is the magic of indexing. Whether you’re looking at property, shares or any other asset, if you’re looking at an index it’s useless to you unless you know how it’s calculated and what it represents.
In this case, what’s called a “housing affordability index” isn’t just a representation of housing costs, but also a measure of housing finance costs. Specifically it’s a measure of movements in variable mortgage interest rates. As we all know, the Reserve Bank has been cutting interest rates like there’s no tomorrow. So next month’s mortgage payment has gone down more than housing prices have gone up and, hey presto, housing is now “more affordable”.
A year ago I calculated my own “variable mortgage payment index” (above) and I’ve recently updated it. You can see, despite the different names, that it and the housing affordability index track pretty much the same path.
What do these charts tell us? Firstly, it’s variable rate mortgage payments that have become more affordable, not houses. Secondly, mortgage payments are subject to rapid change. In five years the Reserve Bank has cut its cash rate from 7 per cent to 2.5 per cent and none of us know for sure when they’ll reverse these measures.
If you’re borrowing to buy a house, the housing affordability index is effectively giving you an indication of next month’s mortgage payment, which is almost irrelevant. You should be focused on the cost over 5, 10 or 25 years – the period over which you’ll pay it off.
In plain English, property isn’t particularly affordable, especially in our capital cities, and low interest rates are just a temporary band-aid over that fact, not a low-cost housing solution. If you’re a potential buyer, don’t be fooled by an index that wants you to think otherwise.