Housing affordability improves as house prices dip, home mortgage rates stay flat
18/04/2012 
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Housing affordability seems to be improving as buyers stay away
Houses prices are sliding in most capital cities in Australia. The November increase in interest rates was the one too many from the RBA, who seem on a mission to bring house prices down, slowly and gently to where more home buyers can afford them.
Homes for sale are sticking in the market longer, and homeowners are either removing their homes from the market, multi-listing the property with many real estate agents or having to lower their price expectations.
This is affecting new home sales as new home hopefuls that cannot sell, are having to shelve home building plans.
If buyers don’t present soon then I expect the RBA to have to retreat on interest rates. That is unless they have a percentage figure in mind for reduction.
This sales slump has to be affecting land prices also. I estimate that it costs about $100,000 more to build a home, than buy one ready to move it, so I suspect that land prices have got ahead of the market, and need to be reduced by $100,000. many developers may have overspent of land acquisitions, and if that is the case we may see some facing bankruptcy soon, based on their sales figures.
Is more building innovation by home builders the problem?
The HIA recently encouraged home builders to innovate more, and that is partly the answer, because home buyers that cannot get their needs met with current homes will be enticed to build.
Is building land too expensive?
I say the core problem is that interest rates have been too low for too long and home buyers no longer question the price of land, all they do is look at if it is affordable. Affordable at low mortgage rates, is not the same as when the mortgage rates climb to a few percent higher.
A client last week asked me to finance a block of land in a NSW regional centre, that was bought for $185,000 six years ago. The current valuations are coming in at $110,000 to $120,000. What happened to the housing shortage?
If the Reserve Bank really wants to get the house prices lower, all it has to do is gradually raise the cost of money. That would see house prices fall further, if that is the RBA intention.
The rule of thumb for Housing Market health
It has been said that new home building approvals give the best view of the health of the housing market, not house prices or land prices.
Well both house values and land values have been falling for the best part of a year, so I suspect that we are in a home buyers market, where the home buyers are refusing to buy.
Maybe home buyers are expecting the market to fall further, and so would be mad to buy a home, and lock themselves to a bigger mortgage than necessary
What happened to out housing shortage?
Remember the housing shortage? it was 80,000 units, then 120,000 homes short, then 180,000 homes needed this year more than would be built, and by the end of the year I was going to be 200,000 homes too few to meet demand.
Well it seems that that housing demand is elastic. People want to buy houses for investment or as owner occupiers as long as prices are rising and mortgage rates are low.
As soon as interest rates rise, and prices fall, home buyers seem to go to water. I was at a display home village recently and the weekly traffic was less than one visitor per week, per home displayed.
On the basis that most people are using display homes as free entertainment, or looking for reno ideas, this does not bode well for home builders everywhere.
Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers.
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