The ability of Australians to pay off their home loans fell at alarming rates in the first year. This trend seems to be growing.

Bluestone Home Loan’s latest report showed that the affordability index increased to 96.6 in January.

The index recorded a 2.2% rise in January, compared to December which saw a 1.5% increase.

Higher index readings mean that more households will need to have income to service a mortgage.

Bluestone Home Loans’ consultant economist, Dr Andrew Wilson, said that because of the rising house prices, buyers have been borrowing more to keep pace with the market.

“With subdued incomes growth and flat interest rates, this resulted in a higher proportion of buyer incomes required for loan repayments,” he said.

All states experienced a decline in affordability. The ACT was the worst affected, closely followed by South Australia and Victoria.

CoreLogic data from January showed that Canberra’s median house price rose 1.8% to $1.03m, while units rose 1.3% at $594,992 and respectively.

Canberra, along with Sydney and Melbourne, has houses that have a median property value greater than $1m per month.

Despite declining prices in other states, New South Wales was the most affordable with an index that exceeded the national.

The median Sydney house price was $1.4m. While the median unit value in Sydney was $837.640.

Dr Wilson explained to me that financial institutions’ tight lending policies would restrict borrowing capacity. This could lead to lower demand and sidelining buyers.

“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,” he said.

“Lower prices growth will act to stabilise the decline in underlying home lending activity that has emerged over 2021 — continuing low interest rates, the easing of covid restrictions and concerns, a reviving national economy and the imminent return of mass migration will also support solid home lending through 2022.

Risky mortgage rising

The Australian Prudential Regulation Authority (APRA) reports that approximately 24.4% of Australians had new residential loans in December. This is an increase by 23.8% compared to the previous quarter.

Data also showed that investors outperformed owners-occupiers when it comes to new mortgages. The first represented 30% of all new commitments in December.

In October 2013, APRA revised its guidance to banks. It increased the minimum rate buffer by at LEAST 3 percentage points (pps).

This will reduce the maximum borrower’s borrowing capacity by about 5%.

Wealthi founder Peter Esho stated, “Homeowners and homebuyers should look at the growth in earnings before making larger mortgage commitments.”

“The rise in the debt-to-income ratio is a concern and it should be watched closely. When property prices rise, we usually see loans, and some riskier loans start to rise as well,” he said.

The Australian Bureau of Statistics reported that in December quarter the wage price index increased by 0.7%, while residential property price index growth was 4.7%.

“This has to be driven and matched by an increase in wages. So, we have to see if wages are increasing to ensure that affordability — and the ability to repay loans — will not be an issue.”