How to know what home you can really afford

A new state-of-the-art tool is giving Australians crucial insights into what they can and can’t afford when looking to buy a home.

The PropTrack Housing Affordability Index is a new state-of-the-art measure of Australian housing affordability.

The index tracks the proportion of home sales Australian households across the full income distribution have been able to afford over the past 30 years.

This is because housing affordability is dramatically different depending on what you earn, where you live and how old you are.

The PropTrack Housing Affordability Index is a new state-of-the-art measure of Australian housing affordability.

Until now, affordability measures have been simple comparisons between typical home prices or mortgage repayments and incomes for an average household.

These measures are commonly used because they are easy to calculate with a small amount of data.

While simple, they fail to capture the full experience of all Australians – which right now is a nationally critical issue.

The PropTrack Housing Affordability Index instead incorporates detailed data on households and homes to present the most comprehensive measure of housing affordability available.

The PropTrack Affordability Index uses household incomes across the full distribution, and interest rates over time to track what proportion of home sales all households could have afforded. For instance, currently a median-income household can afford only 13 per cent of all homes sold over the past year – a record low. For low-income earners, it’s more like 2 per cent.

The headline Index combines results for all incomes. Higher values, closer to 1, represent better affordability. Crucially, the index is comparable both across regions (for instance, NSW has the worst current housing affordability), as well as across time, despite changing incomes, interest rates and home prices.

PropTrack economist Paul Ryan.

The first step in improving housing affordability is better understanding the problem.

That’s why at PropTrack we think it is critical to develop a modern, comprehensive measure that enables the best comparison of housing affordability across Australia, as well as to other points in history.

Originally published as How to know what home you can really afford