1st March 2021
Housing Affordibility – March 2021
Has Housing become Unaffordable?
Record low interest rates and a shortage of housing in the post- pandemic period has led to strong upward pressure on property prices during the second half of 2020 & early 2021.
This has led many ask how home buyers can now afford to purchase a home.
A helpful way to answer this question is by looking at current & historical real market transactions together with interest rates at each point in time.
Case Study 1
Actual property that sold some 5 years apart:
- January 2015 $700,000 Mortgage Interest Rate 4.75%
Interest Servicing Cost: $33,250 per year
2. August 2020 $980,000 Mortgage Interest Rate 3.25%
Interest Servicing Cost: $31,850 per year
This example shows that it is $1,400 per year more affordable to service debt on this property than 5 years ago.
Case Study 2
Actual property that sold some 20 years apart
- April 2000 $400,000 Mortgage Interest Rate 8.25%
Interest Servicing Cost: $33,000 per year
2. December 2020 $1,350,000 Mortgage Interest Rate 2.50%
Interest Servicing Cost: $33,750 per year
This example it is $750 per annum less affordable per year to service debt on this property than 20 years ago!
Of course these examples are simplified and do not take into account market rentals, size of deposit and lending restrictions which are also part of the story.
However, it does show that although prices have increased considerably in both examples, low interest rates mean that affordability of the residential property market has not changed much at all.