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Mortgage affordability sees steepest annual decline in 12 years

An affordability index has tracked the largest annual rise in the amount of average income needed to repay an average mortgage, since 2010.

Bluestone Home Loans’ mortgage affordability index came in at 96.6 over the January quarter, compared to 93.8 in the three months to December.

The higher the Home Loan Affordability Index number, the higher the proportion of average income required for the average home loan, and the lower the affordability.

There had been a 2.2 per cent increase in the index over the three months to January, spiking from the 1.5 per cent growth recorded over the December quarter.

Over the year to January, national home loan affordability had declined by 16.3 per cent – a record 12-month fall since Bluestone began the data series, in January 2010.

The affordability index has tracked above the long-term average of 87.1 during the two years to January.

NSW and Victoria had experienced the steepest declines in affordability over the year to January, with plunges of 20.3 per cent and 18.8 per cent respectively. The two states were notably higher than the national average.

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Other states were below the national benchmark, including Queensland (down 13 per cent for the year), South Australia (-9.3 per cent), Western Australia (-3.7 per cent), Tasmania (-10.9 per cent), the Northern Territory (-6.7 per cent) and the ACT (-10.9 per cent).

But during the quarter, the ACT led the downwards trend in affordability, with the top three-month decrease of 3.3 per cent. South Australia followed, down 2.6 per cent, while Victoria’s affordability diminished by 2.5 per cent.

The NT managed to stay put with no changes during the quarter, while Tasmania’s affordability slipped by 0.7 per cent. Western Australia was down by 1.4 per cent, Queensland dipped by 1.6 per cent and NSW was down by 2.4 per cent.

Andrew Wilson, consultant economist at Bluestone commented that the above-average index levels indicated a “clear prospect of continuing easing of house price growth and declining home loan activity”, after the boom through 2021.

“Strict lending conditions from financial institutions however place a ceiling on borrowing capacity that can sideline buyers and result in reduced demand and lower prices growth,” he said.

“Flattening prices growth in the previous high-flying Sydney and Melbourne housing markets reflect significant declines in affordability over the past year, restraining the capacity of buyers to bid up prices.”

For now however, sales volumes have remained robust off the back of low unemployment and easing of COVID restrictions, Dr Wilson added.

Continuing low interest rates and reopened international borders are also expected to keep supporting home loan growth through the year ahead.

[Related: Investor lending growth outpaces owner-occupiers: APRA]

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