The housing affordability that will matter

When people talk about housing affordability, they are not always talking about the same thing. There are three distinct housing affordabilities:

• purchase affordability - how much it costs to buy a new or existing house at the time of the purchase,
• repayment affordability- how much it costs to service a mortgage on a house, and
• rental affordability- how much it costs to rent a house.
  

In this post I want to talk about the one that will be important over the next 18 months: repayment affordability. 

As interest rates were lowered following the COVID pandemic, these were capitalised into higher housing prices. This is a long run trend, since the peak home loan rates in 1990. As lower and lower interest rates have allowed borrowers to borrow more money, this has contributed to higher and higher house purchase prices. [Note, this is not the only contributor to growing house prices; for example, long-run growth in two income households has also been important].

But this is all about to change. It has been more than 30 years since Australia has operated in world of high inflation. Most of our nation’s policy thinking is now rooted in the low interest world of recent decades. Yet the latest headline inflation figure of 5.1 per cent suggests we might be about to re-experience high inflation (above the agreed target of keeping inflation within a 2 to 3 per cent per year range).