Earlier this month, US property portal Zillow examined how far mortgage rates would need to fall for homes in various cities to be considered affordable for a typical household. It found the national figure was 4.43 per cent, a drop of 2.29 percentage points from current U.S 30-year mortgage rates. Yet even at zero per cent, cities such as San Jose, San Francisco, San Diego, New York, Miami and Los Angeles would remain unaffordable.
Tarric Brooker, writing in his Avid Commentator Report, wondered how those figures might look in Australia’s five largest capitals. Using Zillow’s affordability definition of mortgage costs taking up no more than 30 per cent of household income, he ran the numbers assuming buyers already have a 10 per cent deposit and enough cash for stamp duty and other costs.
The first city to pass the affordability test under falling rates was Perth, at 1.18 per cent. Melbourne would require 0.56 per cent and Brisbane 0.39 per cent. Sydney and Adelaide would not meet the mark even if rates fell to zero. In Adelaide, households would still need an income 7.5 per cent above the median. Sydney would need 37.9 per cent more.
Brooker then modelled a more plausible scenario where average owner-occupier variable rates are cut by two percentage points. That would mean the median Sydney household needs to earn 143.7 per cent more to afford a median-priced home. Perth, the most affordable in this set, would still require an income 48.7 per cent higher.
In another scenario, he assumed mortgage rates fall by 48.5 per cent in relative terms, mirroring the largest cut in Australian history. Even then, Sydney households would still need 115.1 per cent more income. Brisbane would require 47 per cent more, Adelaide 64.6 per cent, Melbourne 43.4 per cent and Perth 31.2 per cent.
“Interest rate cuts can in a vacuum help more prospective buyers into the housing market, but as these various analysis show, they are far from a silver bullet solution,” he wrote. Rate cuts often place upward pressure on prices, erasing any short-term benefit. “If affordable housing cannot be achieved by any reasonable or even unreasonable level of interest rate cuts given the circumstances we currently find ourselves in, then the focus realistically needs to be on bringing housing prices down.”
Even under his more achievable definition of affordability, with prices stagnating or rising slower than wages, Brooker estimates it would take more than a decade to reach the goal nationally, and longer in the capitals. “Australia’s housing market is in need of a profound change and a dramatic reduction in housing costs to help boost the economy and assist younger demographics out of the proverbial hole driven by the loss of the last two decades worth of consumption growth,” he said. One element of that change, he added, will likely involve cutting the cost of building new homes.
In a separate exchange on X, Brooker explained how the current market is functioning despite strained affordability. “As of the latest data 82 per cent of new housing finance stems from existing home owners or property investors,” he said. Cash purchases account for between 20 and 25 per cent of transactions, leaving fewer than one in six sales to new entrants. Of those, up to 40 per cent receive federal assistance through Housing Australia’s Home Guarantee schemes, with more help coming from state or territory grants.
On parental assistance, Brooker cited Jarden Australia’s estimate that up to 75 per cent of first-home buyers get help from the Bank of Mum and Dad, while DFA puts the number at more than half. “In short, most new market entries are not what one would describe as organic in terms of historical norms,” he said. “Which leaves most transactions effectively people trading houses who already have existing equity.”
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🏠Aussie #housingcrisis deepens: Even 0% rates won't make Sydney/Adelaide affordable.📉Analysis shows median households need 37.9% more income.💰82% of loans go to existing owners.🏗️Calls for construction cost cuts. #TheIndianSun @AvidCommentator
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