Housing affordability falls in February as prices rise: Moody’s

New mortgage borrowers now need a larger chunk of their income to meet monthly repayments, says Moody’s.

Moody’s said housing affordability will continue to decline, despite low interest rates.

Housing affordability for new mortgage borrowers in Australia deteriorated for the five months to February due to rising housing prices but experts warn lending is not at concerning levels just yet.

Credit agency Moody’s Investors Service said Australian households with two income earners needed 24.6 per cent of their monthly income to meet monthly mortgage repayments in February, up from 23 per cent last September.

The proportion has also risen from 22.7 per cent last June and July, when new mortgages were the most affordable in a decade, as rates plunged in the response to the coronavirus crisis but prices had yet to take off.

Despite worsening in Australia’s five largest capitals — Sydney, Melbourne, Adelaide, Brisbane and Perth — over the five months to February due to significant price rises from September, housing affordability was better than the respective 10-year average for each in February as low interest rates provided some relief for now.

Moody's said demand from owner-occupiers and specifically first-home buyers has been a key driver for the recent increase in housing prices. It expects affordability will continue to decline on rising housing prices, despite low interest rates.

“Housing prices and interest rates would have to increase materially for affordability to be the worst in a decade. We modelled the effect of housing price, interest rate and income changes on housing affordability in Australia. The modelling shows housing prices and interest rates would have to increase materially for affordability to deteriorate beyond its worst levels observed over the past decade,” Moody's said.

The property market through the start of 2021 has proven unseasonably strong, with the number of homes selling up by more than a third compared to last year. Data from Realestate.com.au shows residential sales were up 33.2 per cent on the same time last year. Homes were also selling faster, taking just 48 days through February, compared to a 71 days peak in June 2020 and 52 days at the same point of 2020.

The low number of properties available has also been a factor pushing up prices as buyers competition remains heated. REA Group director of economic research Cameron Kusher said the unprecedented growth in house prices will likely stabilise over the coming months as more people decide to sell.

The rise in sales at higher prices and declining affordability has resulted in massive mortgage lending. January data from the Australian Bureau of Statistics found borrowing for the purchase of residential property hit a record $28.8bn in January 2021, up 34.8 per cent from the decade average.

Despite this, property researcher CoreLogic’s head of research Eliza Owen believes changes to lending standards is unlikely, with the handing out of loans considered “high-risk” by the Australian Prudential Regulation Authority (APRA) rising only marginally over the December quarter.

The portion of new mortgages lent on interest only terms hit 19.2 per cent in the December 2020 quarter, up from 18.5 per cent in the previous quarter and only marginally higher than the 18.7 per cent two year average. It is also well below the record high of 45.6 per cent, which was recorded over the June 2015 quarter.

“While APRA’s December quarter statistics show a trend towards ‘riskier’ styles of lending, the magnitude is not likely to be large enough to trigger a regulatory response,” Ms Owen said.

“But if this trend continues, or indeed accelerates, it becomes more likely we will see a regulatory intervention aimed at curbing financial stability risks related to the housing sector.”