Housing affordability to worsen despite falling house prices, says Moody’s Investor Service

Despite the likely decline in property prices, housing affordability in Australia will worsen this year, according to experts.

Housing affordability is expected to deteriorate over 2022.

Housing affordability is expected to worsen in 2022 despite falling property prices, according to Moody’s Investor services.

Moody’s analyst Si Chen said while interest rates are rising, affordability will deteriorate.

“Property prices will likely decline and household incomes will gradually increase, but not sufficiently to improve housing affordability while interest rates are rising,” he said.

Worsening housing affordability is negative for new mortgages in residential mortgage-backed securities (RMBS) portfolios as it increases the risk of delinquencies and defaults, particularly with inflation raising cost of living pressures.

On average, Australian households with two income earners needed 26.8 per cent of monthly income to meet monthly mortgage repayments on new loans by the end of May, up from 25.7 per cent in January, Moody’s said.

This measure of housing affordability deteriorated in all Australian capital cities in May compared with January and was worse for houses than apartments.

“Over the rest of 2022, homebuyers will need an increasing share of income to meet mortgage repayments,” Moody’s said.

Moody’s modelling shows if the RBA raises the cash rate to 2.85 per cent and property prices decline by around 10 per cent, housing affordability will continue to worsen making the share of household income borrowers need to meet repayments on new mortgages increase to an average of around 31 per cent in Australia.

“If the RBA raises the cash rate to 2.85 per cent this year, our modelling shows housing affordability will continue to worsen unless housing prices decline by around 22 per cent, a materially bigger decline than we currently expect by the end of this year”, Moody’s said.

In Sydney, the least affordable city, new borrowers needed 37.0 per cent of household income to meet mortgage repayments in May, compared to 34.8 per cent in January 2022.

Borrowers in Melbourne needed 29.8 per cent of their income, up from 28.6 per cent in January. In Brisbane borrowers needed 23.1 per cent, up from 22 per cent in January; Adelaide 23.1 per cent, up, from 21.6 per cent; and Perth 16.3 per cent, up form 16.2 per cent, Moody’s said.

It said for all capital cities except Perth, the share of household income borrowers needed to meet repayments on new mortgages was worse in May than the respective 10-year average for each city.

The official cash rate in Australia currently sits at 0.85 per cent and is expected to increase again at RBA’s next monthly meeting on July 5.

“We expect affordability will continue to deteriorate as the RBA raises interest rates further to combat inflation,” Moody’s said. “Property prices will decline and household incomes will increase, but not to the extent that they improve housing affordability while interest rates are rising”.

Last week ANZ warned that a faster path of RBA rate hikes and a hawkish policy statement this month will hit house prices.

“We have downgraded our housing price forecast to a fall of 5 per cent in 2022 and a further 10 per cent in 2023. This would result in a housing price reduction of around 15 per cent between April 2022 and December 2023” ANZ economists said.

Sydney and Canberra housing prices are expected to fall the most.

ANZ recently increased its cash rate forecasts to predict a rate of 2.6 per cent by early 2023.

PropTrack economist Anne Flaherty said non-discretionary inflation will also contribute to housing affordability.

“The cost of living is rising most rapidly for non-discretionary spending. Inflation for non-discretionary spending is up 6.6 per cent (since March 2021) so households are already having to spend a lot more for the cost of living (and) coupled with higher mortgage repayments (this) puts a lot of pressure on affordability”.

Originally published as Housing affordability to worsen despite falling house prices, says Moody’s Investor Service