By Gillian Bullock, ninemsn Money
The latest interest rate hike has dealt yet another blow to housing affordability and pushed even more people into housing stress.
Even before the latest hike, more than 1.1 million Australian households were spending more than 30 percent of their gross income on either mortgage or rent the measure of housing stress.
According to the latest figures from the Commonwealth Bank and Housing Industry Association, mortgage payments accounted for 32.3 percent of total first homebuyer income in the December quarter, which was up 0.4 percent on the September quarter. This put housing affordability at a record low. And there have been two rate rises since, bringing the base rate to 7.25 percent.
And if 2.3 percent is the average, that implies there are a number of householders spending upwards of 50 percent on paying for their homes.
At the time of the release of the housing affordability figures, HIA chief economist Harley Dale said that national housing policies to boost the supply of new dwelling stock had a vital role to play in restoring housing affordability to acceptable levels.
Earlier this month the Rudd Government announced housing affordability measures aimed largely at the rental market, including financial incentives for private investors to rent out their properties at 80 percent of the market price and the construction of 100,000 new affordable properties.
While the scheme has been welcomed, the message from most commentators is that there is no silver bullet solution to the problem.
"There are no short-term solutions as there is just not enough supply (of rental accommodation) and the costs of funds are too high given the current cost of property (for investment in new developments)," says John Edwards, managing director of Residex. "You can't solve it overnight."
Supply or lack thereof seems to be the theme that recurs with most commentators.
Dr Shane Oliver, chief economist at AMP Capital, says the key is to boost supply.
"If you release a lot more land and increase supply then that will go some way to solve the issue," says Oliver. "Median house prices are running about 6.5 times the median household income in Australia compared to a ratio of around 3.5 times in Australia. It's a supply side issue."
BIS Shrapnel estimates that Australia needs 180,000 new dwellings a year to meet demand and yet only 150,000 are being built.
As Angie Zigomanis, senior project manager at BIS Shrapnel, says: "It will be hard to get that extra 30,000."
O'Brien expresses concern about the government's proposal to provide private investors with tax credits of $6000 a year for 10 years for new properties that are rented at 20 percent below the prevailing market level.
"There is some concern that setting the rent based on 80 percent of the prevailing market level, that property will still not be affordable for some," says O'Brien.
"You need to breach that gap. Perhaps you should take 80 percent of the median rate of Melbourne (or Sydney) rather than 80 percent of each individual area. The median figure would be lower and more people would then benefit, although there is the flipside that it makes it less attractive to invest in high cost areas and will only encourage building in low cost areas that are not close to employment or services."
Meanwhile, Oliver says there is only a 40 percent chance that the Reserve Bank will lift rates in May and he is hopeful that there will not be another rise this year.
But while the RBA may be seen as the baddies in hiking rates, ANZ chief economist Saul Eslake says it really has no option but to act when it does.
"The RBA has been given independence to achieve a target of two to three percent inflation which has been set by elected governments," says Eslake. "This figure has not just been plucked out of thin air. An inflation rate of two to three percent is not too low to be ultra-dogmatic but sufficiently low so you don't notice it. It's only now that it is 3.5 percent that people have started to notice and it is precisely at these levels we should be bringing it down, otherwise it will get away on us."
Nevertheless interest rates are a blunt instrument.
REIA president Noel Dyett says: "Interest rates are a blunt tool, directly affecting all home buyers across Australia, including those who have not benefited from equity gains in their property. Renters too feel the pain from interest rate rises as lessors raise rents to cover loan costs."
Residex's Edwards suggests we might be better going back to the days when the govenrment controlled how much and who could lend.
"You should control lending activity by controlling the volume, not the interest rate," says Edwards.
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