As illustrated right, housing affordability in Sydney has significantly improved from its heady levels of the late 1980s, when house prices accelerated sharply and mortgage interest rates reached 17%. Irrespective of this, the long-run trend since the 1950s, albeit with some hiccups on the way, remains one of deteriorating affordability.
More recently, affordability improved through the course of 2019, primarily the result of a fall in house prices, as incomes only increased modestly, while mortgage interest rates edged marginally lower. This combination resulted in Sydney housing affordability reaching its lowest, most affordable, level since 2013.
As for the short-term outlook, given the low level of cash rates, and hence mortgage, rates, there seems to be limited scope for borrowing costs to decline much further. Indeed, the intention of the Reserve Bank is to maintain the cash rate around current levels.
Furthermore, with swathes of the population having their income ring-fenced by the Government, the likelihood of a meaningful decline would seem remote. By the same token, the prospect of increasing slack in the labour market, an uplift in income of any magnitude would seem equally unlikely.
So, while changes in mortgage rates and incomes will undoubtedly impact on housing affordability at the margin, the main driver, as of last year, will be house prices.
A backdrop of rising unemployment will increase the default rate on mortgages and, with the uncertainty over future employment and therefore income, potential buyers are likely to be deterred from entering the housing market. This alone could be sufficient to exert downwards pressure on house price growth.
However, add to this is the potential slowing or collapse in net overseas migration, which will reduce further reduce housing demand, thereby exasperating the downwards adjustment on residential property prices.
The extent of any price fall is open to conjecture, with current estimates varying anywhere from -10% to -30% in 2020.
Using various combinations of changes in house prices and incomes it is possible to get an idea of Sydney house price affordability post Covid-19.
Consider house prices declining by 30% and incomes increasing by 5%, housing affordability improves by 37%, aligning with affordability conditions back in 1979. The change in affordability under this scenario is illustrated by the red dotted line in the chart right.
Clearly, it is impossible to know how much property prices will decline. However, what seems clear is that housing affordability will improve for the second consecutive year, something which has not occurred since 2012. Even so, with every corner of the world impacted by Covid-19, Sydney is likely to maintain its status as one of the most expensive cities for housing.