Moody's: Australian housing affordability steady; falls in Sydney, Melbourne

Moody's Investors Service says that low mortgage interest rates have helped keep Moody's Australian Housing Affordability Measure steady at the national level over the past year, offsetting the impact of higher property prices and relatively flat household incomes.

However, the affordability measure deteriorated for Sydney and Melbourne, where dwelling price rises have been more pronounced.

"Furthermore, stress testing in four scenarios also shows that Sydney's market is most at risk of a further deterioration in housing affordability," says Natsumi Matsuda, a Moody's Analyst.

Matsuda was speaking on the release of a new Moody's report, "Australia's Housing Affordability: Steady on a National Basis, But Sydney and Melbourne Deteriorate".

Moody's Australian Housing Affordability Measure calculates the share of income needed, on average, to make monthly mortgage loan repayments. A rise in the index is an indication of a drop in affordability.

As of 31 March 2015, Australian households with a home loan needed 27% of their income, on average, to make such repayments, steady when compared with March 2014.

"In Sydney however, where dwelling prices have been rising rapidly, households spent, on average, 35.1% of their income on repayments as of 31 March 2015, higher than the 10-year average for the city and up from 32.8% in 2014," says Matsuda.

"Affordability also deteriorated in Melbourne, but improved in Perth and Brisbane, while it was steady in Adelaide," says Matsuda.

In both Sydney and Melbourne, the deterioration in affordability was driven by higher prices for houses, rather than units. Nationally, the affordability of units improved slightly.

The results of Moody's stress testing are as follows:

Scenario 1: Dwelling Prices Increase By 10% 

If median dwelling prices increased by 10%, Sydney's affordability measure would rise or deteriorate by 3.5 percentage points, compared with the national deterioration of 2.7 percentage points.

Scenario 2: Interest Rates Change

If mortgage interest rates increased by 100 basis points, Sydney's affordability measure would rise -- that is deteriorate -- by 3.5 percentage points, which is the same as the impact of increasing house prices by 10%. Nationally, the affordability measure would increase by  2.7 percentage points.

If mortgage interest rates declined by 25 basis points in the second quarter of 2015, which is in line with our expectation, the housing affordability measure would improve by 0.6 percentage point on a national basis, all else being equal.

Scenario 3: Single Income Household

Moody's Australian Housing Affordability Measure is calculated assuming a household has two income earners. If the household has only one income earner, Sydney's affordability measure would be above 70%. Using 70% of income to service monthly mortgage repayments is not sustainable.

Scenario 4: Post-tax income

If we use post-tax -- instead of pre-tax income -- to calculate monthly average household income, the Moody's Housing Affordability Measure would be 6 percentage points higher on a national basis. And the affordability measure for Sydney would increase -- that is deteriorate -- the most (+7.8 percentage points), while the measure for Adelaide would increase the least (+ 4.6 percentage points).