Home Loan Affordability Indicator

Monthly Statistical Bulletin Feature Articles

The Home Loan Affordability Indicator (HLAI) shown in Table 5.4 aims to capture the effect of the main influences on housing affordability - average incomes, the average size of a home loan and average interest rates. This indicator is produced jointly by the Real Estate Institute of Australia and mortgage insurer MGICA Ltd. It is published on a quarterly basis, and is available at both a national and state level.

The HLAI is calculated as follows:

HLAI Formula

The median annual family income data are derived from the results of the ABS Income Distribution Survey, updated on the basis of the quarterly change in average weekly earnings. Average annual loan repayment figures are calculated using the average size of new loans made in the quarter, assuming that the loan is being repaid at average interest rates (based on the rates offered by major lenders in Australia). Until recently, 'major lenders' included only banks and building societies but from the March quarter 1996, the rates offered by other financial institutions providing home loans will be included.

An increase in the indicator will result from either a rise in average incomes or a fall in average loan repayments. Thus, a rise in the indicator means that home loans are more affordable.

Graph 1 shows the movement in the indicator since it was first published in March 1980.

Graph 1

Graph 1

In December 1995 (the latest quarter for which figures are available), the HLAI rose 3.3 per cent. This was the second quarter to show an improvement in affordability conditions, after six quarters of deterioration in the indicator. The December quarter improvement reflects a number of factors:

  • increased competition in the home lending market, with traditional lenders having to match the services and rates offered by newer non-bank lenders.
  • lower interest rates - banks and building societies are now offering lower rates and the official cash rate has remained unchanged since December 1994.
  • faster wage growth (although this could lead to higher inflation, possibly resulting in higher interest rates).

Graph 2 shows the two series used to construct the HLAI. As would be expected with data unadjusted for inflation, average incomes have risen steadily over the period shown, with fairly small movements from quarter to quarter. On the other hand, average monthly mortgage repayments have shown much greater volatility, particularly in the period since June 1988. Typically, movements in loan repayment costs have been the main explanatory factor behind movements in the HLAI, although in the most recent quarter both factors made an equal contribution, with average loan repayments falling 1.6 per cent and median family incomes increasing 1.6 per cent.

Graph 2

Graph 2

The lowest value of the HLAI ever recorded is 27.4, recorded in the September and December quarters of 1989. At this time, average loan costs were at record levels, with the average monthly loan repayment exceeding $1,000 in the December quarter 1989. At present, the average monthly loan repayment is $973.

The HLAI has never exceeded the value recorded in the first quarter that the indicator was produced (57.4). The indicator fell below 50 in December 1984, and has only exceeded 50 in one quarter since then - December 1993, when a level of 52.3 was reached.

Further information can be obtained by contacting a member of the Statistics Group of the Parliamentary Research Service.

This feature was prepared by Nicola Chedgey.


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