Affordability "deteriorating" in Melbourne and Sydney: Moody's

Affordability "deteriorating" in Melbourne and Sydney: Moody's
Jessie RichardsonApril 26, 2015

Climbing home prices in Melbourne and Sydney have resulted in declines in Moody's home affordability measure despite low interest rates. Moody's also noted Melbourne and Sydney's "problematic" large loan sizes.

Households across Australia needed to use 27% of their income, on average, to make home mortgage repayments. The same ratio was recorded in March last year.

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In Sydney, however, households are using 35.1% of their income to make their mortgage repayments. In March 2014, Sydney households were putting 32.8% of their income towards their mortgage. March 2015's result is also higher than the city's 10 year average of 33.6%.

In Melbourne, mortgage affordability has also declined, with the share of income needed to make mortgage repayments increasing to 28.2% in March this year from 27.5% at the same time last year.

The Moody's Australian Housing Affordability Measure has remained constant on a national level, in part due to low interest rates. In Perth, affordability measures improved, due to declining home price, with the measure decreasing from 24.6% to 21.9%. Moody's noted Perth's exposure to falling commodity prices in its report.

The report called the affordability deterioration in Melbourne and Sydney "credit negative for new mortgage loans from these cities".

"The larger loan sizes and repayment obligations of new mortgages in Sydney and Melbourne are especially problematic since these mortgages are being underwritten at historically low interest rate," the report reads, noting an average Australian standard variable mortgage rate of 5.65%, while the 10-year average is 7.18%.

"Our forecast is for the RBA to cut the official cash rate - a key determinant of mortgage interest rates - by a further 25 basis points to 2% in 2015.

"However, borrowers who took out loans at historically low interest rates are at a greater risk of not being able to afford repayments when interest rates eventually rise.

"By contrast, mortgages underwritten at higher interest rates pose lower risk when interest rates rise, because borrowers' ability to service these loans has been assessed at higher interest rates."

Although there has been pronounced price increases in Melbourne and Sydney over the past two years, income growth has remained "modest", writes Moody's.

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