Summer Report 2024: Housing affordability turns up the heat for borrowers

The last week of the spring/early summer auction season saw nearly 3,000 capital city auctions take place – 25.8 per cent more auctions than the same time in 2022, which CoreLogic said was “a clear demonstration that vendors have been much more active”.

In December, auction activity remained strong as vendors rushed to get ahead of the January slump in buyer activity. The first week of summer saw 3,041 homes go to auction – a figure beaten the next week (ended 10 December) with 3,186 homes auctioned. This was the second-busiest auction week of the year, behind only the week ended 29 October (3,381). Compared to the same period in 2022, auction numbers were 14.7 per cent higher.

But, while auction numbers were on the up, clearance rates were falling. CoreLogic economist Kaytlin Ezzy stated that the early summer selling season had seen buyers “benefit from more choice, less urgency and greater leverage at the negotiation table amid higher advertised supply levels”.

This has been exacerbated by the housing affordability and servicing issue for home buyers needing a mortgage. House prices rose 8.1 per cent over 2023 (recovering from the 4.9 per cent annual decline recorded in 2022), taking the value of residential real estate to an estimated $10.3 trillion at the end of December.

Similarly, Domain’s House Price Report for the December quarter 2023 found that Australia’s housing market has made a full recovery from the 2022 downturn, with combined capital house and unit prices ending the year on record highs.

The report found that the majority of capital cities saw recovery during the December quarter, with Melbourne expected to make a complete recovery later in 2024.

Preliminary reports show that prices rose 0.4 per cent across the combined capitals over January – an unusual trend given the summer holidays.

But, while rising house prices might be good news for some, housing affordability in Australia has been front of mind for many prospective buyers, economists, and political figures recently.

Prime Minister Anthony Albanese and Treasurer Jim Chalmers have frequently cited mortgage pressures in their speeches, while NAB chief executive Ross McEwan recently wanted that he was worried “the great Australian dream of owning your own home is at risk.”

“Affordability is at a 30-year low and rental prices are rapidly increasing. That’s because we simply don’t have enough houses for our growing population, let alone enough affordable and social housing for people who need support,” Mr McEwan said.

Three factors working in tandem have largely been the main drivers for worsening affordability: rising home values, rising rent values/dwindling rental vacancies, and the 13 interest rate hikes by the Reserve Bank of Australia (RBA).

In fact, a household earning the median income could only afford 13 per cent of homes sold across the country last year, a level not seen since the records began in 1995, according to PropTrack.

Even those taking home high incomes ($200,000 and above) are facing strained affordability conditions, only being able to afford loan repayments on approximately 50 per cent of homes sold over 2023, according to PropTrack.

Borrowers are also facing mortgage repayments of up to 50 per cent more than in early 2022, given the RBA’s 13 rate increases since May 2022.

Speaking on the state of housing affordability, CoreLogic’s head of Australian research, Eliza Owen, said it is “likely to get worse before it gets better” in 2024, particularly as the number of new homes has fallen to decade lows recently.

“Dwelling supply will continue to be strained by the high interest rate environment, which has reduced approvals and potential for new housing development in 2024. Demand will probably be the only thing [that] can adjust in the short term, so we may see average people per household rise,” Ms Owen said.

CoreLogic’s research director Tim Lawless has suggested that the November 2023 rate hike (which took the cash rate to 4.35 per cent) is also going to add more pressure to borrowers and worsen affordability. (However, the incoming stage 3 tax cuts may go some way in alleviating this).

Outlook for 2024

Brokers have been busy servicing clients and writing new loans – with several telling The Adviser that buyers are still coming into market strongly. In fact, figures from major aggregation Australian Finance Group (AFG) revealed that lodgement activity was up 5.27 per cent in the final three months of the year.

Sandy Kelso, founder and director of Kelso Finance Brokers, said she believes we will see more owner-occupiers enter the market.

“As rates have increased, investors have been letting go of their investment properties so that they can hold onto the family home,” she said.

“These investment properties are the perfect entry for first home buyers.”

Ms Kelso added that while rents are at an “all-time high”, clients are beginning to weigh up their options and explore the difference between paying a mortgage and paying rent.

“I do have a lot of clients with pre-approvals ready to pounce on opportunities,” she said.

“Valuations are coming in strong and anyone that bought off the plan a few years ago has benefited with capital growth – especially in Brisbane/Gold Coast.

“We are at the top of the interest rates so people are seeing what their absolute limits are.

Many of the non-bank lenders have reduced their buffer to 2 per cent, whereas the big banks are still at 3 per cent. However, a lot of lenders are beginning to offer refinancing at 1 per cent and I think that will continue.”

Owner and mortgage broker of Wheatley Finance, Andrew Wheatley, told The Adviser that things may “stay more or less the same”, although he did predict competition to normalise in the mortgage market.

“I think one of the big changes we saw more towards the end of 2023 was banks really pulling back on how competitive they are chasing refinances and new business,” Mr Wheatley said.

“Traditionally it’s been new clients getting the best deals, so cashbacks and rates and existing clients get overcharged a bit.

“But at the end [of] last year, it flipped and a lot of banks have been really aggressive in trying to keep the clients they had and giving them good rates of stay, and not being as aggressive with their cashbacks to get new clients.

“I think that that will revert back to normal over the next few months.”

Romy Dhungana, senior mortgage broker at Home Loan Experts, said that the property market is “expected to maintain its resilience, displaying growth and stability.”

“Construction activity is projected to remain robust, responding to the demand for housing. However, monitoring challenges such as supply-chain disruptions and rising construction costs will be essential, as they could impact project timelines and affordability,” Mr Dhungana said.

Additionally, Mr Dhungana shared his outlook on the conditions that remain ahead of first home buyers and investors.

“First home buyers may face challenges in 2024, primarily related to property affordability and changing deposit requirements,” Mr Dhungana said.

“Rising property prices, although moderated compared with previous years, could pose hurdles for those entering the market. Changes in deposit requirements, influenced by regulatory measures or lender policies, will affect the ability of first home buyers to secure a mortgage.”

[Related: Spring Report 2023: Why the property market is blooming]