Affordability in the Perth detached house and unit markets
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Despite the recent cooling of the Australian residential property market, housing affordability remains of key concern to many Australian households. However, the issue of housing affordability is often only examined from the perspective of Australia’s two largest (and most expensive cities) of Sydney and Melbourne. This bulletin seeks to redress this imbalance by examining housing affordability across metropolitan Perth.
Affordability is assessed in both the owner occupier and rental markets by the following four metrics:
- Proportion of annual gross household income required to service an 80% LVR mortgage.
- Ratio of median dwelling price to annual gross household income
- Number of years to save a 20% deposit
- Proportion of annual gross household income required to pay the median rent.
Owner Occupiers
Proportion of household income required for mortgage repayments
Figure 1 examines affordability across the Perth metropolitan residential property market by measuring the share of median gross household income required to cover annual repayments on a median priced house or unit assuming a 20% deposit and a 30-year loan term for the period between 1991 and 2018.
Figures 2 and 3 provide a breakdown of the factors that determine changes in this metric. Namely, house and unit prices, household incomes and mortgage interest rates.
Our analysis indicates that over the course of the study period, the Perth residential property market was most affordable in 1999, at which point the share of gross household income needed to cover house and unit mortgage repayments stood at 22% and 19% respectively.
However, between 1999 and 2008 housing affordability steadily declined with the share of gross household income required to cover mortgage repayments on a house or a unit reaching record highs of 58% and 47% by 2008.
This followed a period of sustained price appreciation during which median house and median unit prices grew at an annualised rate of 14.4% and 13.5%, well above the 5.4% p.a. increase in household incomes over this period. Affordability was further constrained by rising interest rates with standard variable rates on owner occupier mortgages increasing from 6.5% in 1999 to 9.5% in 2008.
Perth capital values continued to rise over the next six to seven years with unit prices peaking at $426,500 in 2014 and house prices peaking one year later at $565,000. The pace of price appreciation, however, moderated considerably over this later stage of the growth cycle, with house and unit prices both rising by circa 3% p.a., below the 4% p.a. increase in household incomes.
In addition, after peaking in 2008, standard variable rates on owner occupier mortgages fell steadily to 5.5% in 2015. This supported affordability with the share of gross household income required to meet house and unit mortgage repayments falling to 37% and 28% respectively by 2015.
Housing affordability has since further improved with the recent softening of the Perth residential market which has seen house and unit values fall by 7.5% and 11.8% from their respective peaks to stand at $522,500 and $385,000 in December 2018.
By contrast, gross household incomes rose (albeit marginally) over this period whilst the standard variable rates on occupier loans fell further to reach a near record low of 5.3% in December 2018.
As a consequence, the share of gross household income now required to cover mortgage repayments on a detached house or unit has fallen to 32% and 23% respectively, to be below their long-term average levels of 33% and 27%.
Notwithstanding, we note that under APRA guidelines which stipulate that lenders should stress test the capacity of new borrowers to service a mortgage interest rate of 7% p.a., the share of household income required to cover house and unit mortgage repayments as at December 2018 would rise to 38% and 28% respectively.
This suggests that should mortgage lenders become more conservative in their willingness to lend, the Perth property market may face continued price pressures over the medium term.
Price to income ratio
Figure 4 provides the median house and unit price to median annual gross household income ratio over the study period. This metric is often used when examining the issue of affordability despite the fact that it does not explicitly account for changes to underlying mortgage rates. Notwithstanding, we would expect this ratio to generally rise during low interest environments and fall when interest rates are high (holding income and all other housing demand drivers constant).
Under this metric, Perth houses and units were most affordable in 1992 at which point the ratio stood at 2.8 and 2.6 respectively and least affordable in 2007 when the ratio reached 7.5 and 5.8.
The increase in price to income ratio in the detached housing market was most pronounced between 2001 and 2007 during which the ratio doubled. By contrast, the pace of increase was more gradual in the unit market with the ratio doubling over the ten years between 1997 and 2007.
Over the past decade, the ratio has broadly steadily declined, reflecting at first a slowdown in the rate at which dwelling price inflation exceeded growth in household incomes and more recently, declining dwelling values as the Perth market softened.
As at December 2018, the price to income ratio stood at 5.9 for houses and 4.4 for units, just above their long-term averages of 5.1 and 4.1.
Years to save a deposit
This metric provides a useful measure of housing affordability for those households that do not yet own a home. Our analysis assumes that households save 15% of their gross household income and determines the number of years required to save for a 20% deposit.
As evident from Figure 5, the number of years needed to save for a deposit for a median priced house or unit peaked in 2007 at 10 and 7.8 years respectively.
The recent downturn in the Perth housing market has, however, since provided some welcome relief to aspiring home buyers. As at December 2018, this metric has fallen to 7.9 years for houses and 5.8 years for units.
Renters
Proportion of household income required for rental payments
Figure 6 shows the share of gross household income required to meet the median rental payment for detached houses and units across Greater Perth for the period between 2001 and 2018.
The share of household income needed to cover rental payments for a house or unit was highest in 2013 at 32% and 29% respectively. This coincided with the peak in median rents (Figure 7) at $480 per week for houses and $440 for units.
Thereafter, the share of household income required for annual rental payments has steadily trended downwards, in line with falling rentals values. Median weekly rents on a detached house and unit stood at $380 and $340 in December 2018, around 20% below their previous peak.
This has supported a fall in the share of household income needed to cover rental payments to 22% for houses and 20% for units. In both instances, this is below their long term-averages of 26% and 23%.
State Capital City Comparison
Figures 8 to 11 provides a cross state capital city comparison of affordability within the unit market under each of the previously analysed metrics.
It is apparent that over the study period, Perth is considerably more affordable than Sydney and Melbourne, marginally more affordable than Brisbane and broadly similar to Adelaide.
There is, however, a notable exception to the above, this being the period between 2007 and 2008, which coincided with the height of the WA mining boom and a peak in Perth’s population growth rate.
In fact, in 2008 Perth ranked jointly with Sydney as being the least affordable unit market, with home owners of both cities having to expend on average around 48% of their gross household incomes for mortgage repayments.
A similar result holds for Perth’s price to income and years to save for a deposit metrics which stood at 5.8 and 7.8 respectively in 2008, matching that of Sydney’s.
As noted above, housing affordability in Perth has improved considerably in both the owner occupier and rental markets in recent years.
In fact, despite the more recent acceleration in the downturn of the Sydney and Melbourne property markets, Perth currently has the most affordable house and unit markets of the five main state capital cities across all metrics. A summary is provided in Table 1.
[1] The median dwelling value of Sydney and Melbourne stood at $808,494 and $645,123 respectively in December 2018, well above the median dwelling value of $612,737 of the combined five-state capital cities, according to the Corelogic Hedonic House Price Index.
[2] Median house and unit price data is sourced from CoreLogic Market Trend data. Annual gross household income is as per the Australian Bureau of Statistics (ABS) Census with growth in household income extrapolated between census dates. Standard variable rates on owner occupier mortgages have been sourced from the Reserve Bank of Australia (RBA).
[3] Over the study period the correlation between standard variable mortgage rates and the price to income ratio for houses and units is -0.50 and -0.46 respectively.
