Housing pain to worsen

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

Analyst Si Chen said that affordability would deteriorate while interest rates were on the increase.

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

Further modelling shows, if the RBA raises the cash rate to 2.85 per cent and 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 about 31 per cent in Australia.

Affordability worsened in all capital cities this year.

In Sydney, the least affordable city, new borrowers needed 37.0 per cent of household income to meet mortgage repayments in May, much higher than Melbourne (29.8 per cent), Brisbane (23.1 per cent), Adelaide (23.1 per cent) and Perth (16.3 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 10year average for each city.

“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.”

Household income will increase in 2022 due to the strength of the Australian economy, with the unemployment rate at its lowest level since 1974 sitting at 3.9 per cent and a 5.2 per cent minimum wage rise in June.

However, rising interest rates will overshadow affordability as the rising interest rate environment will constrain homebuyers’ borrowing capacity.