Moody’s Investors Service says that Australian housing affordability deteriorated over the 12 months to 31 March 2016, requiring homeowners to spend a larger proportion of their income on monthly mortgage repayments. In fact, housing affordability deteriorated in all capital cities, except Perth.

“During the 12 months to 31 March 2016, Australian households spent an average of 27.6% of their monthly income on mortgage repayments, up from 27.0% for the 12 months to 31 March 2015,” says Natsumi Matsuda, a Moody’s Analyst.

“Nevertheless, housing prices fell during the three months to 31 March 2016, suggesting that repayment costs may have peaked,” adds Matsuda.

Moody’s also points out that on 3 May 2016, the Reserve Bank of Australia (RBA) cut the official cash rate—a key determinant of mortgage interest rates—by 25 basis points to 1.75%. The interest rate cut will have a positive influence on housing affordability, though the extent of this impact will ultimately depend on whether there are any flow-on effects to the housing market, where lower rates can put upward pressure on prices.

Moody’s analysis is contained in its just-released report titled “RMBS — Australia: Housing Affordability Has Deteriorated, but Worst May Be Over,” and is authored by Matsuda.

Moody’s report says that affordability improved in all Australian capital cities during the three months to 31 March 2016, but the degree of improvement was insufficient to head off the year-on-year deterioration.

Sydney continues to be the most unaffordable city for homebuyers, with households spending an average of 35.6% of their income on mortgage repayments as of 31 March 2016, followed by Melbourne.

Households in Melbourne spent an average 30% of monthly income on mortgage repayments compared with 27.2% a year ago. Affordability also deteriorated in Adelaide (to 23.2% from 21.9%) due to moderate price increases combined with income declines, and Brisbane (to 24.3% from 23.6%).

By contrast, affordability improved in Perth (to 21.5% from 22.6%), owing to a decline in home prices, and despite household incomes falling by an average 1.4% from the 10-year high recorded a year ago.

Nationally, affordability remains better than the average for the past 10 years. However, homeowners in Sydney are paying 1.7 percentage points more of their monthly incomes towards mortgage repayments than the average over the past 10 years.

Deteriorating housing affordability is credit negative for new mortgage loans and for the residential mortgage-backed securities backed by such loans. Less affordable mortgages raise the risk of delinquency and default, and these risks will increase further if mortgage interest rates rise from their current low levels.

New mortgages in Sydney and Melbourne remain riskier than those in other cities. The higher home prices in these two cities result in larger mortgage loans with more onerous repayment obligations. These obligations are also being underwritten at current low interest rates.

Moody’s stress tested Australian housing affordability under various scenarios. The results show that affordability is slightly more sensitive to housing price changes compared with a year ago. Sydney remains the most sensitive to changes in prices and interest rates.

As for the fall in home prices over the three months to 31 March 2016—particularly in Sydney and Melbourne—this change has been precipitated by a decline in investor activity in the property market, which is in turn due to the introduction of macroprudential measures.

Moody’s report explains that the macroprudential measures were aimed at reducing the banks’ appetite for high loan-to-value and loan-to-income lending, especially in relation to investor loans.

Source: Moody’s