Mortgage rates need to fall to pandemic levels for houses to become affordable: CoreLogic

Interest rate relief is unlikely to help the average household get onto the property ladder, with interest rates needing to fall to pandemic levels before a median home becomes affordable.

The research from property analytics firm CoreLogic comes as stretched households look to the Reserve Bank to make a call on whether inflation has been defeated. Most investment banks are forecasting a 0.25 per cent cut, with timing ranging from February until May. Longer range forecasts suggest rates will bottom out of 3.5 per cent in 2026.

CoreLogic modelled the official cash rate falling from the current 4.35 per cent to 3.1 per cent, and found that even at that level, the borrowing power of a median income household would only improve by $80,000, lifting the value of an ‘affordable’ property from $513,000 to $593,000. That is still well below the current median dwelling value of $815,000.

Basing the calculations on a 30-year loan with a 20 per cent deposit and a median income household of $101,000 spending 30 per cent of household income on a mortgage, CoreLogic’s Eliza Owen said mortgage rates would need to fall to 2.3 per cent. That would effectively mean an official rate of 0.1 per cent, an ‘emergency’ number only seen during the pandemic.

“The gap between where values are and an affordable purchase price actually is determined in a really large part by interest rates. But it also comes back to growth in incomes or reductions in the property price. So something else has to give,” Ms Owen said.

Ms Owen’s comments come as the Government attempts to address skills shortages in the building sector, announcing a a $10,000 boost in earnings to encourage more apprenticeships.

Under the scheme, apprentice bricklayers, electricians, plumbers, carpenters and joiners would receive five payments of $2000 over the course of their training, to hopefully fill the estimated 90,000 shortfall in workers.

The scheme comes as Australian housing affordability is among the worst in the world, with 40 per cent of a household’s disposable income required to service a median priced property.

Over the past quarter century, the only other peak nearly as high was in 2008 when a decade of house price growth was inflated by financial deregulation and easier access to capital, as well as the introduction of the first home owners grant. During the period, excess demand was not met by supply.

Under its housing plan, the Government has a target of 1.2 million homes built over the next five years. But dwelling approvals continue to miss the Government’s target of 240,000 new homes annually. By November last year, just 169,000 dwellings were approved, a 24 per cent decline on the decade average.

Ms Owen said there were another 250,000 approved dwellings still incomplete due to labour and material shortages with competition from public infrastructure projects were partly to blame for the shortfall.

“Supporting more apprenticeships in construction definitely helps with the tightness in labor supply, but it’s only one of many factors that need to be resolved,” she said. “Ultimately, we’re still running about 30 per cent below the annual housing target, and you need further structural changes within the construction industry, like innovation and business investment, to make it more productive.”

Master Builders Australia CEO Denita Wawn has warned that with current building rates, the sector could fall 350,000 homes short of the 1.2m target.

She welcomed the new plan for tradie apprentices but said bolder moves were needed to fast-track visas for skilled labour from overseas.

“We know that the cost of building and construction has gone up 40 per cent over the last five years, and in part that has been because of skill shortages,” she told The Nightly, adding the sector had shortfalls from university-educated to semi-skilled roles.

“We are working in a highly competitive environment internationally with these skill needs - Canada, UK and New Zealand have tradie fast track of specialist visas, and we don’t.”

Private investment was also being delayed by the cost of building combined with a decline in productivity, she said.

“You can’t sell a property and get any return. So, we’re seeing a significant amount of investors just holding onto land until the money is stacking up,” Ms Wawn added.

“Time is money in this sector, and every day you lose is a cost factor that has to be passed on.”

Property prices to remain stuck

With regulators continue to worry about systemic risk in the home lending sector, Ms Owen did not expect much relief in mortgage serviceability buffers to increase borrowing power, and said that the Stage 3 tax cuts had not flowed through to property prices either.

She said industry should brace for the possibility that rate reductions may have little effect on home values and transaction activity this year.

“I expect that you’ll see a bit of a dip in the start of the year, and then as we move through to the second half of 2025, housing values stabilise or even rise a little off the back of real income growth.”