Sydney feels squeeze on homes & petrol

But housing affordability has improved

Sydney feels squeeze on homes, petrol - National - smh.com.au

By Jessica Irvine, SMH Economics Correspondent
May 22, 2008

FIRST home buyers are taking out smaller mortgages on more modest homes to beat the financial squeeze - made tighter again yesterday as Sydney's petrol prices hit a record high.

National housing affordability fell to a record low in the first three months of the year as mortgage holders were hit with a string of interest rate rises, a survey by the Housing Industry Association and the Commonwealth Bank released yesterday found.

However, in Sydney affordability improved slightly, aided by falling home prices in some areas.

According to the survey, mortgage repayments on the average first home in Sydney fell by $100 to $3064 a month in the March quarter. This saw repayments in Sydney fall behind other capitals including Brisbane ($3538), Perth ($3185) and the ACT ($3402).

The news came as the price of petrol in Sydney hit a record high - above 160 cents a litre. Prices could climb even higher today, with Thursday marking the traditional peak of the weekly petrol price cycle in Sydney.

The NRMA said the price of unleaded petrol hit 162.9 cents at at least one Sydney service station, while prices averaged 147.5 cents a litre across the city.

On housing affordability, the executive director of the Housing Industry Association in NSW, Graham Wolfe, said the lower figure for mortgage repayments in Sydney reflected a fall in the number and size of new homes sold.

"Sydney's new home buyers appear to be responding to the recent interest rate rises … by borrowing less and purchasing modest homes."

Brian Redican, an economist at Macquarie Bank, said the slight improvement in affordability was due to a reduction in expectations and falling prices.

"Because the rental market is now so tight, some of those first home buyers are thinking of buying a two-bedroom apartment rather than renting a three-bedroom house. They are being forced into cheaper properties."

Falling prices for apartments were also helping.

"There is more evidence that in more suburbs house prices have fallen," Mr Redican said. "A two-bedroom apartment that might have cost $420,000 is now on the market for $400,000."

However, Mr Redican said affordability might not be as bad as portrayed in the survey. Bureau of Statistics figures show the average new mortgage for the average first home buyer is about $230,000, implying an average first home price of around $300,000, assuming a 20 per cent deposit. The survey estimates the median first home price nationally to be about $425,000.