RBA raised its cash rate target again last Tuesday to a six-year high of 1.85%.

CBA and ANZ have lifted variable mortgages by 0.5% points 2 days later. Other banks are expected to follow.

The hiking interest rates have reduced property demand, leading to cooling markets across Australia. Australia’s average dwelling values declined by 1.3% in July, while 5 of 8 capital cities saw their dwelling values drop, except Adelaide, Perth, and Darwin.

Seeing that, many may think the whole country is stepping into a slump just as it entered a nationwide boom during the pandemic. However, it’s not the case. Data shows that markets across the country are starting to diversify, with some losing pressure, some remaining the pressure, and others picking up.

Why is that? one of the reasons is the relative affordability. Demands are reducing in many markets because buyers can’t borrow as much as before, and their loan repayments have been lifted substantially as interest rates rise. However, there are still markets where buyers don’t need to reach their total borrowing capacity to buy a house; and their loan repayments are well below 30% of their gross income, which is commonly considered the affordability benchmark.

This week we reviewed the affordability levels of Australia’s SA3 regions based on their median house price as of May 2022 and their median household income as of the 2021 Census.

– We call a market “overvalued” when the loan (80% LVR, 30-year, P&I) repayments for a median-priced house are higher than 30% of the local median household income.

– We call a market “undervalued” when the loan repayments for a median-priced house are lower than 30% of its local median household income.

Most regions are now overvalued  based on this measure due to price surges in the past two years, lagged income data, and rising interest rates. If loan interest rates are 4.5%, which is common nowadays, 84 out of 330 SA3s are undervalued (affordable) around 1/4. If loan interest rates rise to 5.5%, the figure will decrease to 55, which is 1/6 of all Sa3 regions.

It is important to note that our assessment of mortgage affordability and over/under value can’t be used to forecast price drops or gains, they simply display a measure of relative attractiveness of prices using available data. At the end of the day, affordability is always a hotly debated topic because some consider price multiples against income (ability to get into the asset), others consider mortgage repayments (ability to hold the asset), others just refer to the actual price and/or pace of growth levels overall. Regardless of these options, if prices are rising, and if properties are being transacted, all within Australia’s tightly managed credit and lending standards, then to an extent one can assume those buying are buying within their means/comfort and assets are affordable.

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So, where are these regions? Are they just several outback mining towns where personal incomes are high, but no one outside of workers and families lives there?

There are some of these regions – however, not all of them. Let me show you three standouts in the undervalued cities that are in demand, display diversity in employment and infrastructure, are well populated cities, and where houses will still be affordable even with interest hikes (based on mortgage service ability measures used).

Townsville, QLD

·       Median House Price:$382,000

·       Median Household Weekly Income: $1,701

·       Affordability @4.5% Interest Rate: -41% Undervalued

·       Affordability @5.5% Interest Rate: -26% Undervalued

·       Rental Vacancy Rate: 0.4%

Townsville is regarded as the capital of Northern Queensland. The local economy was negatively impacted in the early 2010s, dragging its property market down. The median house price started to bounce in 2019/20 and just exceeded the 2014 level last year.

Townsville’s economy has been recovering since 2017, boosted by numerous infrastructure investments in defence, transport, energy, education and more. The unemployment rate dropped from 10%+ back then to a low 3.3% in Q1 2022.

The robust economy attracts people from the south. Local vacancy rates have are at a crisis level, indicating high real housing demand relative to its supply level.

With a strong economy and high housing supply, Townsville’s property market is expected to continue growing, rising rates aren’t likely to be an affordability obstacle.  

Mt. Gambier, SA

·       Median House Price: $334,000

·       Median Household Weekly Income: $1,232

·       Affordability @4.5% Interest Rate: -17% Undervalued

·       Affordability @5.5% Interest Rate: -5% Undervalued

·       Rental Vacancy Rate: 0.3%

Mount Gambier is the second largest city in South Australia. It’s the centre of a large transport industry due to its central location between Melbourne and Adelaide. Its unemployment rate dropped to 3.7%, the lowest in more than a decade.

As a regional town that doesn’t see many migrants in and out, Mount Gambier’s property was primarily driven by the local demand before the pandemic and had been enjoying stable returns. In recent years, tree-change trends and extremely low levels of local supply have triggered a surge in property value. However, current prices remain very affordable.

Vacancy rates in Mount Gambier are also at a crisis level of 0.3%, indicating high housing demand.

It is important to note that a large number of new houses under construction(incoming supply) may relieve the housing crisis and slow Mount Gambier’s house price surge in the short to medium term, pending who the end buyer is (owner occupiers or investors). In the interim, affordability doesn’t seem to be too big of an issue that would limit demand, at least not for now.

Rockhampton, QLD

·       Median House Price:$375,000

·       Median Household Weekly Income: $1,512

·       Affordability @4.5% Interest Rate: -28% Undervalued

·       Affordability @5.5% Interest Rate: -14% Undervalued

·       Rental Vacancy Rate: 0.3%

Rockhampton is a Central Queensland city famous for its beef. Like Townsville, the local economy was impacted by the end of the mining boom. Property values started to decline in 2014 and bounced since 2019.

Rockhampton’s unemployment rate reached its peak (10%) in 2015 and has been trending down ever since, sitting at 6.1% in Q1 2022, the lowest level in a decade. Rockhampton’s local economy is boosted by the multiple-billion-dollars’ worth of spending across renewable energy, military, mining, tourism, and transport projects in the short term. Agriculture, over the long term will remain as a very important pillar to its economy.

Like other markets mentioned, rental markets here are also very strong at 0.3%vacancy rates, indicating high housing demand. The high pressure in the rental market will eventually be passed on to the sales market due to its affordability, pushing prices further up.

While highlighting the undervalued markets today, we are not saying that the overvalued markets won’t grow.

1. It’s not all about affordability but more about market pressure.

If it’s all about affordability, Sydney house prices would have stopped growing years ago.

As we mentioned at the beginning, relative affordability is one factor affecting housing demand, while growth is controlled by market pressure, which reflects the relationship between demand and supply.

On the demand side, population pressure, local economic activity, lifestyle, connectivity and many more factors are all contributing to housing demand. On the supply side, the vendors’ activity (reflected by the number of listings)and construction activity (new houses) influence how many houses are available for purchase. Lastly, sentiment is the display of behaviours and how people feel, all contributing to capital growth and more important than over/undervalue.

You need to examine all the factors to assess a market’s pressure and growth prospect. These 3 markets out of all the undervalued regions, demonstrate some of the upside from those factors.

2. Undervalue/Overvalue is relative.

We assessed the affordability of each region based on their median house price and median household income. However, not all properties are of the median price, nor do all property buyers earn a median-level income. As long as a location shows healthy market pressure and within your affordability range, you will likely get a well-performing house for your portfolio.

A large portion of the regions is not severely overvalued. In our model, many cities with high market pressure, such as Dubbo and Barossa, are less than 5%overvalued when the interest rate reaches 5.5%. These cities can easily move to the “undervalued” category once the local household income growth exceeds the house price growth. From 1 July 2022, the National Minimum Wage has increased by $40 per week, which could be the start of nationwide income growth.

InvestorKit is a buyers’ agency that focuses on data analysis to not just look for “affordable” locations, but identify high-pressure markets that will ensure your portfolio’s overall health and long-term growth. Would you like to know more about our strategies in response to the interest rate hikes? Click here and request your 45-min FREE no-obligation consultation today!

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