Analysis by Moody’s Investors Service on Monday shows the jump in Sydney’s median house price,now at $1.3 million,means a household with an annual income of $135,000 will spend more than 45 per cent of it servicing their new mortgage. In February,they needed 36 per cent of their income.
Housing affordability is on track to deteriorate even more due to slow wages growth.Supplied
It’s little better in Melbourne,where the median house price is now more than $960,000,with households spending an average 32.1 per cent of their incomes on the mortgage. Melbourne households were paying 29.7 per cent of their incomes towards their mortgages in February.
The Reserve Bank last year cut the official cash rate to 0.1 per cent,taking mortgage rates to their lowest level on record. Federal and state government programs aimed at supporting the property market funnelled up to $88,000 to first-home buyers.
Coupled with the closure of the international borders,there has been a surge in house prices in the nation’s capital cities and across almost every region.
Moody’s analysts Pratik Joshi and Ilya Serov said housing affordability across the country had deteriorated over the past year,with Sydney and Melbourne potential buyers the worst hit.
“Australian housing affordability,which deteriorated over the seven months to September 2021,will continue to worsen over the rest of the year and into early 2022 because of ongoing property price rises,” they said.
“In Sydney and Melbourne,the share of household income borrowers need to meet repayments on new mortgages is now worse than the cities’ averages for the past decade.”
Moody’s expects dwelling prices – which have climbed in Sydney by 1.3 per cent so far this October and by 0.7 per cent in Melbourne – to continue increasing albeit at a slower pace.
The biggest threat,however,could come from a lift in official interest rates. While the Reserve Bank has signalled it will not lift rates until 2024,financial markets are pricing in two rate increases by the end of next year. An inflation report from the bureau of statistics on Wednesday will give some guidance to the nation’s price pressures.
So large are current new mortgages,Moody’s estimates a quarter percentage point increase in interest rates would translate into a 0.7 percentage point increase in the share of an average household’s income needed to service their loans.
The current average mortgage rate is 3.45 per cent. It would only have to increase to 3.87 per cent for a home buyer in Sydney and to 4.3 per cent in Melbourne for the affordability of all dwellings to reach decade-long lows.
Interest payments as a share of income have tumbled due to record low mortgage rates on offer to new buyers. Over the seven months to September this year,lending rates on average fell by 0.2 percentage points.
But affordability deteriorated through that period,with Moody’s noting prices are increasing much quicker than income growth.
Moody’s said lending rates have bottomed but without a sharp lift in wages growth,affordability would get worse.
“Household incomes have been stagnant for the past year. The economic recovery after coronavirus restrictions ease will be positive for wages,though the influx of overseas workers once international borders reopen will dampen income growth,” they said.
“All up,we do not expect income growth to materially offset housing price gains over the rest of this year and into 2022.”
The run-up in prices has prompted concerns about the stability of the financial system. The Australian Prudential Regulation Authority is tightening lending standards in a move that will reduce by tens of thousands of dollars the amount home buyers can borrow.
Under its new standards,banks have to use more cautious interest rate assumptions when assessing new customers. The change is expected to reduce new customers’ borrowing capacity by about 5 per cent.
Ratings agency S&P Global,however,said on Monday the tighter standards would do little to cool the market,arguing APRA will have to put in place even more measures.
Analyst Nico DeLange said while APRA had “fired the first shot” in trying to reduce risks in the financial system,its actions would have only a modest impact.
“We believe this is likely to have only limited success in arresting the rising risks to the banking system,or house price growth,” he said.
“This is mainly because only a small proportion of customers borrow at their absolute capacity;some borrowers are already constrained by the floor rate;and investors may also be sitting on liquidity buffers,in our view.“