Affordability improves in March as house prices fall

An analysis by Moody’s Investors Service has found a 2.2 percentage point improvement in housing affordability in Australia in March, with the proportion of household income needed to meet repayments on new mortgages dropping 2.2 percentage points from March 2018 to 26.5 per cent last month.  

Sydney recorded the largest improvement in housing affordability, with the proportion of household income needed to meet repayments on new mortgages declining by 4.7 percentage points over the year to 33.2 per cent in March 2019.

It decreased by 2.2 percentage points to 29.4 per cent over the same period in Melbourne, 1.3 percentage point to 22.5 per cent in Brisbane, and 0.3 of a percentage point in Perth.

On the other hand, housing affordability deteriorated in Adelaide, with the proportion of household income needed to meet repayments on new mortgages rising by 1.3 percentage point to 23.1 per cent in the year to March 2019.

The ratings agency attributed the overall improvement in affordability to dwindling house prices and “modest” increases in average incomes.

In the year to March 2019, median house prices fell by 6.5 per cent nationwide. The decrease in prices was highest in Sydney at 10.7 per cent, followed by 5.3 per cent in Melbourne and Perth, and 1.2 per cent in Brisbane. Conversely, house prices in Adelaide rose by 4.6 per cent over the same period.  

Average incomes rose by 2.8 per cent Australia-wide in the year to November 2018, with the largest increase seen in Brisbane (5.8 per cent), followed by Sydney and Melbourne (both 3.2 per cent) and Adelaide (0.3 of a percentage point). On the other hand, average incomes fell 2.5 per cent in Perth over the same year.

Moody’s also tested the impact of changes to house prices, incomes and interest rates on affordability, finding that for every 10 per cent change in house prices, percentage of income needed to meet mortgage repayments changes by an average of 2.6 percentage points across Australia.

Sydney was found to be the most sensitive to changes in the three variables, with a 10 per cent change in house prices to result in a 3.3 percentage-point change in the proportion of household income needed to meet mortgage repayments.

A 5 per cent decrease in household income in Sydney would raise the proportion of household income needed to meet mortgage repayments by 1.7 percentage point, compared to an average of 1.4 percentage point across Australia. On the other hand, a 5 per cent rise in household income in Sydney would result in a 1.6 percentage-point decrease in the portion of household income needed to meet home loan repayments.

Moody’s sensitivity test for interest rate changes found that for every 0.25 percentage change in home loan interest rates, the percentage of household income needed to meet repayments changes by 0.8 percentage point in Sydney, compared to an average of 0.7 percentage point across Australia.

In the year to March 2019, average mortgage interest rates rose slightly from 5.2 per cent in March 2018 to 5.4 per cent last month, but Moody’s said the effects of this increase were “far outweighed” by declining house prices and rising incomes.

Looking to the future, Alena Chen, vice president and senior analyst at Moody’s, said: “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.”

[Related: Housing affordability debate intensifies]