FALLING house prices will continue to assist affordability over the next 12 months for new mortgage borrowers, according to Moody’s Investors Service.
Conditions improved over the year to March, with the proportion of household income needed to meet repayments on new mortgages falling from an average 28.7% to 26.5%, for a household with two income earners taking out an 80% loan-to-value mortgage.
Median housing sales prices fell by 6.5% in that time as incomes increased by an average 2.8%. Average mortgage interest rates rose slightly to 5.4% in March 2019 from 5.2% a year earlier, but Moody’s vice president and senior analyst, Alena Chen said the effects of this were far outweighed by declining house prices and rising incomes.
“Moreover, we expect housing prices to continue to fall moderately over the next year – due to reduced credit supply by the banking sector – and incomes are also rising, and these two factors are in turn driving further improvements in affordability,” she said.
NAB last week downgraded its house price forecast for 2019 after weak conditions early this year were worse than expected, and is now anticipating peak-to-trough falls in Sydney and Melbourne of 20% and 15% respectively. The revision followed Moody’s Analytics announcing its own downgraded forecast just days earlier. AMP Capital is expecting a top-to-bottom fall in prices in Sydney and Melbourne of 25%, spread out to 2020.
Moody’s Investors Services said more affordable housing reduces the credit risks of newly originated mortgages, which is positive for new residential mortgage-backed securities backed by such loans.
Last week, the Reserve Bank said the residential price slump has put some borrowers at risk of negative equity, although prices would need to drop “significantly further” for negative equity to become widespread, and low unemployment levels are expected to provide a safeguard.
RBA data showed around 2.75% of securitised loans by value are in negative equity, representing just over 2% of borrowers.
According to Moody’s Investors Service, affordability improved in Sydney, Melbourne, Brisbane and Perth over the year to March, but deteriorated in Adelaide. The biggest improvement in housing affordability was in Sydney, where prices dropped 10.7% over the year.
While the proportion of household income needed to meet mortgage repayments dropped 4.7% to 33.2%, but the city remains the country’s least affordable. The proportion required in Melbourne fell from 31.6% to 29.4% as prices dropped 5.3% and average weekly incomes increased 3.2%.
Brisbane saw a 1.3% fall in required income to 22.5% as prices slipped by 1.2%, and in the proportion was down 0.3% to 19.4%.
Adelaide saw a 1.3% increase to 23.1% as prices increased 4.6%.
Housing affordability is better than the 10-year average across Australia and in each capital city.
Sydney was found to be the most sensitive to housing price, income and interest rate changes, according to analysis by Moody’s Investors Service.
For every 10% change in housing prices, the percentage of household income needed to meet mortgage repayments changes by 2.6% on average in Australia, but in Sydney this is 3.3%.
A decrease of 5% in household income translates to an increase in 1.4% in the proportion of household income needed to meet mortgage repayments, and an income increase of 5% would mean a drop of 1.3% in the income needed. In Sydney, the household income shifts respectively meant a 1.7% increase and 1.6% decrease.
For every 0.25% change in mortgage interest rates, the percentage of household income needed to meet mortgage repayments changes by 0.7% on average across Australia, while Sydney would see a 0.8% change.
Australian Property Journal