The Housing Industry Association (HIA) reports that record low interest rates helped drive the HIA-CBA Housing Affordability Index to its most favourable level in 12 years during the March 2014 quarter. The HIA is the voice of Australia’s residential building industry.

According to HIA Senior Economist Shane Garrett, the continuation of record low interest rates, combined with decelerating home price increases and growth in earnings over the quarter saw the HIA-CBA Housing Affordability Index improve to its most favourable level since March 2002.

Shane Garrett explains the HIA-Commonwealth Bank Housing Affordability Index improved by 2.1 per cent during the first quarter of 2014 and affordability is now 10.8 per cent more favourable than a year ago. While increases in home prices over the past year have been significant, the impact of lower interest rates and continued earnings growth has ensured that home purchase affordability has improved over the past year for existing home owners and those on the cusp of entering the market in the short term.

The RBA has signalled that interest rates are set to remain low for some time; as home price pressures ease off, HIA expects home owner affordability to remain reasonably favourable for the foreseeable future.

However, he cautions that the key policy challenge exists well beyond this cyclical improvement in home owner affordability. Ensuring adequate and affordable housing for those harbouring aspirations to one day enter the home ownership market and for the large number of rental households in Australia requires a concerted policy focus on boosting new housing supply.

In the March 2014 quarter, the HIA-CBA Housing Affordability Index improved in two of the six surveyed capital cities: Sydney (+2.2 per cent) and Perth (+0.1 per cent). Affordability was unchanged in Melbourne during the quarter. Three of the six capital cities saw affordability deteriorate during the March 2014 quarter: Adelaide (-4.6 per cent); Hobart (-1.3 per cent); and Brisbane (-0.7 per cent). Affordability in the Australian Capital Territory saw an improvement of some 7.7 per cent during the quarter. Three of the six regional markets saw affordability improve during the quarter: Western Australia (+2.8 per cent); New South Wales (+1.3 per cent); and South Australia (+0.3 per cent). Affordability deteriorated in regional areas of Tasmania (-6.1 per cent), Queensland (-2.2 per cent) and Victoria (-1.8 per cent) during the March 2014 quarter.

The HIA New House Affordability Index declined to -2.3 for the March 2014 quarter, indicating that the affordability of new houses continues to be somewhat less favourable than existing houses.