Housing prices are on another tear, increasing in the vast majority of Australia’s markets. But does this mean property has become less affordable?

The reality is changes in housing prices can be a poor guide to how affordability has changed over time. Accounting for the increase in the prices of all goods, as well as reduced interest rates, shows real repayments have only increased by about 22% since 2003 despite housing prices more than doubling.

The analysis shows the level of housing repayment costs are actually at the same level as in 2007.

The fact that housing repayment costs are significantly below the levels of 2010 suggests the growth in housing prices is not yet at an end.

The selling prices of homes have more than doubled

Housing prices have increased dramatically across Australia over the past two decades.

Housing price indices produced by the Australian Bureau of Statistics, which track average price changes, show prices in each capital have more than doubled since September 2003. In aggregate, prices in the eight capital cities are up 116%.

Housing prices have increased significantly since 2003

This increase in price seems incredible – homes are twice as expensive as 20 years ago. But does this mean property is twice as unaffordable?

Property prices don’t tell the whole story.

Other prices in the economy have also increased

What matters is how the cost of housing has increased relative to other goods. If housing has doubled in price, but so have all other costs, there has been no ‘real’ change in the price of housing – the cost of a house in terms of the other things a buyer had to forego to afford it has stayed the same. This is why inflation needs to be considered when comparing the prices of things over time.

Housing prices have increased relative to other goods

Tracking housing prices relative to the price of other goods makes a big difference; housing has only increased by about 50% more than other things over the past two decades. However, in Melbourne and Hobart, real housing prices have increased by 80 to 90%.

The cost of borrowing has fallen markedly

Due to its substantial cost, almost all purchasers borrow money to buy housing. And the cost of borrowing has fallen significantly as interest rates have dropped. Repayments on a new variable-rate mortgage of $100,000 have fallen from more than $800 per month in 1995 to $400 today (or even less with current fixed-rate deals).