Housing affordability worsens: Moody’s

The Australian 12:47pm October 18, 2017

Michael Roddan

Australia’s housing affordability crisis is worsening, with record-high debt levels exposing borrowers to greater risk of defaults and making them more vulnerable to economic and property market shocks, according to global ratings agency Moody’s.

In a new report, Moody’s found housing affordability continued to decline across the whole of Australia, on an average basis, although it was most severely felt in Brisbane and Melbourne.

Sydney, where housing prices have recently started to cool, saw an improvement in the proportion of household income being spent on mortgage repayments.

“However, with affordability deteriorating on average on an Australia-wide basis, we believe housing market imbalances and the large build-up of household debt continue to pose risks to the performance of Australian residential mortgage-backed securities,” Moody’s vice president and senior analyst Alena Chen said.

Australia’s decade-long debt binge has left the nation with the world’s second highest levels of household debt.

Household debt to income recently hit a new record high of 193.7 per cent. Ms Chen said “housing market imbalances” and “the large build-up of household debt” continued to pose risks to mortgage-backed securities.

“High debt levels make households more vulnerable to economic or housing market shocks, and make meeting mortgage repayments more difficult, increasing the risk of delinquencies and defaults,” Moody’s said.

Sharp defaults and arrears in mortgage-backed securities, where home loans are bundled together in bonds that are then sold to investors, played a key role in the global financial crisis 10 years ago. Although delinquencies are historically low, the rate of arrears recently touched a five-year high in Australia, according to Moody’s.

The Reserve Bank on Friday revealed deep concerns about the property market, warning that interest-only borrowers were vulnerable to “payment shock” and that many households could be forced to dump their homes on the market. The RBA said it will launch “top-down stress tests” of the banking system, which will be carried out on top of the supervision from the Australian Prudential Regulation Authority.

Moody’s found the average Australian couple taking out a loan with a 20 per cent deposit must spent 28.7 per cent of their monthly income on mortgage repayments. That’s up from 27.4 per cent in September last year.

Rules brought in by APRA, which is concerned about the high rate of investors and borrowers with interest-only loans, have cooled the market in Sydney. Still, prices in other cities, such as Melbourne, are continuing to increase. “The long term efficacy of regulatory measures in moderating price appreciation remains to be seen,” Moody’s said.

Sydney still remains the least affordable city in Australia, and changes in house prices have a greater effect on borrowers. A 10 per cent change in property prices in Sydney chews up an extra 3.6 per cent of household income, higher than the national average of 2.9 per cent.

The RBA has also raised concerns around the number of investors who own multiple properties, with the number of investors owning five properties growing by 7.5 per cent in a single year. Ten per cent of investors own more than two properties. Many borrowers in their 50s and 60s are also holding interest-only loans they are unlikely to be able to repay.