• New modelling from Betashares shows Australian housing affordability has improved to its highest level since March 2002.
• While house prices have grown much faster than incomes, falling interest rates have helped offset the cost of buying a home.
• However, the experience differs dramatically across capital cities, with Sydney proving to be far and away the most unaffordable city in the country.
• Visit Business Insider Australia’s homepage for more stories.

It might not feel like it, but there’s not been a better time to buy a home in Australia since 2002.

New analysis from ETF provider Betashares shows that a cash rate of 0.1%, the lowest in the country’s history, has pushed affordability to recent highs.

“Our modelling suggests that overall national home loan affordability is at its best level in 18 years – March 2002 – thanks to the overall decline in house prices relative to household income over the past three years and, perhaps most importantly, the substantial reduction in mortgage rates,” chief economist David Bassanese said.

All property markets have unsurprisingly had a markedly different experience over the last year. Melbourne ranked as the worst-affected by the pandemic, while others like Brisbane have recently hit new highs.

But while there’s been serious divergence between capital cities, the – statistically – average Australian couple would appear to be in a better position to buy.

To be precise, they earn a combined after-tax income of $135,000, want to buy a $700,000 house in a capital city, and would be paying off a 2.9% mortgage rate.

“That implies 26.2% of after-tax income would have to be devoted to meeting mortgage repayments on a 25-year loan, compared with an average since mid-2004 of 32.8%,” Bassanese said.

Naturally the actual percentage differs city to city. Perth and Darwin rank as the country’s most affordable cities, requiring just 17% of income to service a mortgage as of June this year.

Adelaide, Brisbane and Hobart were hovering around the 20% mark, while Canberra and Melbourne on average eat up roughly a quarter of a couple’s income.

Sydney, unsurprisingly, ranks as a statistical outlier and far and away the least affordable place to buy. The average house requires more than 34% of take home pay. To put that in perspective, that’s more than twice the percentage of pay as a Perth couple.

Its seemingly insurmountable lead in this area all but ensures it will remain the country’s least affordable city for years to come.

While Bassanese doesn’t have crystal ball, he does contend that prices may be set to surge if history is anything to go by.

“The last time our national mortgage affordability estimate was better than this was in March 2002. In the following two years, national house prices rose 36%. What we know from history is that when mortgage rates drop, new home buyers don’t just pocket the savings – they simply bid more for properties as their affordability limit has improved,” he said.

What has changed this time is reassurances from the Reserve Bank of Australia (RBA) that interest rates aren’t moving for three years, providing unprecedented guidance on the state of repayments.

“History suggests that the way the market will find equilibrium under these circumstances is through a lift in house prices, until mortgage affordability for the marginal buyer is reduced to at least the long-run average – if not pushed to previous trough levels if a bubble mentality develops,” Bassanese said.

With lending surging and auction clearance rates rising in recent months, affordability may be soon relegated to the history books.

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