Housing Affordability and Household Expenditure for Homebuyers
While it is true that prices have already jumped significantly over the recent decades, the relationship between housing costs and disposable income has remained stable over the past twenty years.
For Australian National University associate professor Ben Phillips, this could mean that the housing affordability may not be as bad as news reports are suggesting.
In a commentary for The Conversation, Phillips said housing affordability looks quite different if the actual costs relative to income are taken into consideration.
Housing costs last shot upwards between 1984 and 1993 due to a combination of weak income growth and strong costs appreciation – particularly in mortgages as a result of high interest rates.
“Since peaking in 1993 costs remained relatively stable with rents increasing modestly over the past 10 years, while mortgage costs declined,” Phillips said, adding that the share of costs in disposable income has since lingered around 16% according to the Australian Bureau of Statistics.
Phillips said housing affordability can also be ascertained using housing stress. For this, the rule of thumb is to use the 30/40 stress rule, which defines a household being in stress if they allot more than 30% of their income on housing costs, or if they are in the bottom 40% of income distribution.
“Using this housing stress measure, we see a significant increase in renter stress, firstly between 1984 and 1993 and then from 2007. Mortgage stress is largely unchanged since 1988 following an increase between 1984 and 1988,” Phillips said.
As a part of the overall picture – it is important that households understand their true spending. The use of HEM (household expenditure measure) is now widely used by most financiers when assessing your borrowing power for a mortgage application. This is the same method used by the Australian Bureau of Statistics (ABS). All lending applications today must have a reasonable and accurate level of expenses. HEM is only a guide as living expenses can vary significantly depending on how you choose to spend your money.
To establish your borrowing power or tools to track your expenditure, contact Donna-lee on 0418903954 or donna-lee@celsiusfinance.com.au