Moody's: The problem with housing affordability in Australia's capitals may have peaked

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Australian housing affordability deteriorated over the past 12 months, but the worst may now be over.

That’s the view of Natsumi Matsuda, an analyst at Moody’s Investor Services, who notes that Australian two-income households spent an average 27.6% of their monthly income on mortgage repayments in the 12 months to March, up from 27.0% a year earlier.

“Affordability deteriorated in all capital cities, except Perth,” said Matsuda. “Sydney (35.6% of income) is the most unaffordable city, followed by Melbourne (30%).”

The chart below, supplied by Moody’s shows the percentage of household income spent on mortgage repayments in Sydney, Melbourne, Brisbane, Adelaide and Perth over the past decade.

“Nationally, affordability remains better than the average for the past 10 years. However, homeowners in Sydney are paying 1.7 percentage points more of their monthly incomes towards mortgage repayments than the average for the past 10 years,” notes Matsuda.

Despite the improvement over the past 12 months, he believes that housing costs may have peaked due to a pullback in housing prices (something that subsequently reversed in April according to Corelogic RP Data) along lower mortgage rates courtesy of the Reserve Bank of Australia’s rate cut earlier this week which took the official cash rate to a historic low of 1.75%.

She explains:

Although housing affordability deteriorated year-on-year, conditions began to improve in the three months to 31 March 2016, suggesting that repayment costs may have peaked for the time being. In fact, affordability improved in all Australian capital cities during this period, although the degree was not enough to head off the year-on-year deterioration.

The improvement over the three months to 31 March 2016 was driven by a pullback in housing prices. The Reserve Bank of Australia’s (RBA) cut to official interest rates on 3 May 2016 will have a further positive influence on housing affordability, though the extent of this impact will ultimately depend on whether there are any flow-on effects to the housing market, where lower rates can put upward pressure on prices.

The debate over housing in Australia — something of a constant nowadays — has intensified in recent weeks as both the Coalition and Labor debated negative gearing, with the government arguing that any changes could lead to a dramatic fall in house prices.

But yesterday prime minister Malcolm Turnbull appeared to suggest that if younger generations are locked out of the housing market, then it’s up to their wealthy parents to help them out, telling ABC radio presenter Jon Faine “you should shell out for them; you should support them, a wealthy man like you”.

While prices continue to trend higher, building approvals have also risen for two months in a row and now new home sales have bounced.

Housing Industry Association (HIA) figures released today show new property sales surged by 8.9% in March after seasonal adjustments, rebounding strongly following a 5.3% contraction in February. It was the largest percentage increase since January 2010.

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