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Australian housing: affordability continues to plunge

19th October 2007
By Petter Ingemarsson

Housing affordability in Australia has hit an all-time low following seven years of decline.

The quarterly housing affordability review by the Housing Industry Association has indicated that affordability in Australia has hit an all-time low. The housing crisis has been brought on by nine consecutive rate rises and continued high established property prices. In response, it is expected that the affordability concern will enter the political sphere and become an important election issue.

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The Housing Industry Association (HIA) and Commonwealth Bank of Australia publish a quarterly index of housing affordability, which examines what proportion of income the average Australian would have to devote to buy a home. The figures for September 2007 show the housing affordability index falling to its lowest level since the inception of the index in 1984. The index fell from 96.9 in June 2007 to 94.9 in September 2007. In September 2006 the index stood at 103.4, and in September 2005 the index was 107.3.

The major cause of the record low housing affordability is rising interest rates. The Reserve Bank of Australia (RBA) raised interest in August 2007 for the ninth consecutive time. The target rate is now set at 6.5%, which is the highest rate since 1996. At the same time, property prices have grown strongly over the last 20 years. Over the last year, established house prices have jumped by 11.4%. As a result of these factors, the housing affordability index has seen a year-on-year decline for the past seven years.

The situation is at its worst in Sydney, where the average monthly loan repayment rose from A$2,994 in June 2007 to A$3,113 in September 2007. The HIA calculates that the average first-home buyer would have to commit 31.7% of household income to service the mortgage.

This issue is now becoming so important that it will inevitably become an area of contention in the next election. Housing affordability cuts to the core of politics in Australia as home ownership is a highly sensitive issue. For the Labor Party, housing affordability can be used to discredit the Liberal Party's claim that the average worker has never had it better. For the sitting government, it is vital to show that this area of the economy is under control.
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