Home Loan Affordability

The Real Estate Institute of Australia (REIA) publishes a widely reported measure of home loan affordability in Australia. The REIA indicator, which measures affordability with respect to new loans only, shows the proportion of median family income that is devoted to meeting average loan repayments. An increase in the indicator, therefore, represents a deterioration in affordability.

Loan repayments as percentage of family income

Source: Real Estate Institute of Australia/Deposit Power

Home loan affordability has fluctuated considerably over the past 20 years. According to the REIA indicator, new home loans were least affordable in 1989–90 when an average of 35.9 per cent of median family income was being spent on new loan repayments. By 1993–94, however, that figure had fallen to 20.2 per cent, the lowest level reached in the past 20 years. After rising and then falling again, the trend since 1997–98 has been predominantly upwards. By 2006–07 the indicator had climbed to 35.0 per cent, a worse level of affordability than that which existed during most of the late 1980s when interest rates were considerably higher than they are today. The deterioration in affordability since 1998 coincides with a period of rapid growth in house prices.

BIS Shrapnel and the Commonwealth Bank of Australia and the Housing Industry Association (CBA-HIA) also produce measures of housing affordability. The CBA-HIA affordability index specifically measures accessibility to home ownership for an average first-home buyer. The BIS Shrapnel Home Loan Affordability Index, which is available on subscription only, shows the proportion of full-time male earnings needed to meet the mortgage repayments on a ‘typical’ housing loan.

The Productivity Commission has identified various problems with the above indicators, noting that they ‘all suffer from methodological and data problems that preclude precise conclusions’. For these reasons, they should be used more as indicators of general trends than as indicators of shorter-term cyclical movements.

Library documents
Tony Kryger, ‘Home loan affordability—measurement and trends’, Research Note, no. 8, Parliamentary Library, Canberra, 2006–07.

Documentation
Real Estate Institute of Australia/Deposit Power, Home Loan Affordability Report, Joint Quarterly Survey, no. 91. June Quarter 2007.
Commonwealth Bank of Australia and the Housing Industry Association, Affordability Report, September quarter, 2007.
Productivity Commission, First Home Ownership, Report, no. 28, Melbourne, 31 March 2004.