According to the Real Estate Institute of Australia's (REIA) recently released Housing Affordability Report, house affordability is at its cheapest level since December 2009, after improving in the December quarter. The portion of income required to meet loan repayments fell by 1.4% to 30.4%.

REIA president Peter Bushby said housing affordability had been improving over the past year and a half as the Reserve Bank of Australia continued to cut the cash rate.

"Rising income and declining mortgage repayments contributed to the improvement, with the median family income increasing 2.2 per cent and the average monthly loan repayments decreasing 2.1 per cent," he said.

NSW remains the least affordable state, with the proportion of income required to meet loan repayments at 36%, while the ACT is the most affordable, requiring just 18.7% of income.

Mr Bushby added that changes to the first home owner's grant in NSW and Queensland had resulted in falls of 28.8% and 10.4% respectively in the number of first home buyers. The proportion of first home buyers in December was 14.9%, less than half that in May 2009, and well below the long-term average of 20.2%. Mr Bushby suggested first home buyers need more than interest rate cuts to encourage them to enter the market.

Queensland, NSW and South Australia announced during 2012 that they would only provide grants to first home buyers for new homes, and not to those buying established housing. "Only 18% of first home buyers are buying new homes with 82% purchasing established dwellings", said Mr Bushby.

Foolish takeaway

Further interest rate cuts may be needed to improve the sentiment of first home buyers, something they may get as soon as this week, with media reports that ANZ Bank (ASX: ANZ), Commonwealth Bank (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corporation (ASX: WBC) may cut mortgage rates out-of-cycle.

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