Bassanese reverses on mortgage affordability

By Leith van Onselen

On 26 September 2012, the AFR’s David Bassanese published an article arguing that Australian house prices are set to jump in value by 10% to 15% by late 2013 as the Reserve Bank of Australia (RBA) cuts interest rates.

One of the reasons behind Bassanese’s call was the claim that mortgage repayments as a percentage of disposable income had fallen to a level that was some -6% below average levels and was set to improve further:

“…the mortgage repayment as a percentage of disposable income was around 6 per cent below the average since mid-1986. While house prices to disposable income were 16 per cent above their long-run average, this was more than offset by below-average mortgage rates.”

Bassanese then followed-up on 28 September claiming that mortgage affordability had been broadly stable over recent decades:

“…house prices are not nearly as overvalued as some suggest. Long-term measures of mortgage affordability, for example, have been broadly stable over recent decades…”

With these comments in mind, I was surprised to read over the weekend that Bassanese seems to have changed his view, now arguing that mortgage affordability, while much improved, is still far worse than than what presided pre-boom:

“…while home loan affordability has improved relative to the average of recent years – it’s nowhere near as good as it was from the late 1990s and prior to the boom. Households now also carry much higher levels of debt and have become more cautious since the global financial crisis.”

This is a welcome change. RBA statistics show clearly that mortgage interest payments against aggregate household disposable income is around 40% higher today than when mortgage rates peaked at 17% in 1989-90 (see below chart). The RBA’s statistics, however, only tell part of the story, as they do not include the extra principal repayments also required today because of much higher house prices.

Twitter: Leith van Onselen. He is the Chief Economist of Macro Investor, Australia’s independent investment newsletter covering trades, stocks, property and yield. Click for a free 21 day trial.