CHART OF THE DAY: This is what will happen to housing affordability when interest rates go up again

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Interest rates are at an historic low and that means mortgage payments are lower and housing more affordable.

That statement is true in most cities in Australia, except for Melbourne and especially for Sydney where housing prices have taken off in a low interest rate world.

About 40% of Australia’s mortgages are in Melbourne and Sydney and these, compared to the rest of Australia, are larger and have been underwritten using historically low interest rates.

The Australian average standard variable mortgage interest rate is now 5.65% – far lower than the 10-year average of 7.18%.

Most forecasts are for the RBA to cut the official cash rate by a further 25 basis points to 2% in 2015.

However, if mortgage interest rates rise by 100 basis points or one percentage point, which everyone expects they will eventually, the proportion of wages needed to service a home loan in Sydney would rise by 3.5%. As this chart shows, that’s about the same as the impact of a 10% increase in house prices:

According to the latest Moody’s Australian Housing Affordability Measure, Sydney is the capital city at most risk of a deterioration in affordability.

Over the year to the end of March, Australian median dwelling prices increased by an average of 3.7% nationally, led by Sydney (+11.7%), Adelaide (+5.2%) and Melbourne (+4.7%). Median dwelling prices were flat in Brisbane and fell in Perth (-4.8%).

During the same period, average weekly incomes in Australia rose by just 1.3%, and the cities with the largest increases in dwelling prices did not experience the largest rises in incomes.

Moody’s affordability measure represents the share of income needed to make monthly mortgage loan repayments, using average weekly earnings.

In Sydney, the affordability measure deteriorated to 35.1% at the end of March from 32.8% the same period a year before. Median dwelling prices in Sydney rose 11.7% over the year.

The affordability measure for Melbourne also deteriorated to 28.2% from 27.5%.

A higher affordability measure indicates a higher proportion of household income is needed to make monthly mortgage repayments.

However, affordability improved significantly in Perth, to 21.9% from 24.6%. Affordability also improved in Brisbane, to 23.4% from 24.4% and was steady in Adelaide at 22.1%.

Australia’s national affordability measure of 27% is lower than the 10-year average of 29.6%.

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