Moody's Investors Service found if the RBA raises the cash rate to 2.85% this year, property prices would need to fall 22% to compensate, which it does not forecast happening.

If the cash rate rose to 1.35% - only half a percentage point higher than where it is currently - property prices would need to decline 14.2% to see an improvement in mortgage affordability.

If it rose to 1.85%, prices would need to decline 18.3% to compensate.

The Reserve Bank previously said that the cash rate profile is somewhere around 1.50% to 1.75% by the end of 2022.

It’s important to note that Moody’s Investors Service measures housing affordability by the proportion of household income borrowers need to meet repayments on mortgages.

The report showed that on average, households with two income earners needed 26.8% of monthly income to meet their monthly mortgage repayments on new loans by the end of May. This is an increase of 1.1 percentage points from January 2022.

This measure of housing affordability declined in all Australian capital cities in May compared to January.

Sydney had the highest household income to meet mortgage repayments in May with 37.0% while Melbourne followed with 29.8%, Brisbane and Adelaide with 23.1% respectively, and Perth with a low 16.3%.

Anything over 30% is commonly dubbed mortgage stress.

"[A rising interest rate] increases the risk of delinquencies and defaults, particularly with inflation raising the costs of living,” analyst Si Chen said.

"Higher interest rates will dampen property market sentiment, weighing on house prices.

"However, our housing price and interest rate scenarios found that prices will not decline to the extent that housing affordability improves while interest rates increase this year."

In a presentation last week, CoreLogic head of research Eliza Owen said during Perth's most recent market downturn, property prices declined 20% and arrears doubled to 3.0% - "still at very low levels".


Houses are less affordable than apartments

Moody’s data also revealed house buyers needed 30.2% of household income to meet their mortgage repayments in May while apartment buyers needed 21.4%.

Sydney had the highest disparity between house and apartment affordability with house buyers needing 47.1% of income to meet mortgage repayments compared to 26.6% for apartments.

Rising household incomes not enough to combat affordability

Although it is expected that household incomes will rise this year due to the strong Australian economy, low unemployment rates, and a 5.2% minimum wage increase, this may not be enough to improve housing affordability.

Moody’s expects that the rising interest rates will overshadow higher incomes and restrict potential homebuyers’ borrowing capacity.

Despite falling property prices and increasing household incomes, housing affordability will continue to worsen for borrowers over the coming year and into 2023. 


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Important Information and Comparison Rate Warning

Base criteria of: a $400,000 loan amount, variable, fixed, principal and interest (P&I) home loans with an LVR (loan-to-value) ratio of at least 80%. However, the ‘Compare Home Loans’ table allows for calculations to be made on variables as selected and input by the user. Some products will be marked as promoted, featured or sponsored and may appear prominently in the tables regardless of their attributes. All products will list the LVR with the product and rate which are clearly published on the product provider’s website. Monthly repayments, once the base criteria are altered by the user, will be based on the selected products’ advertised rates and determined by the loan amount, repayment type, loan term and LVR as input by the user/you. *The Comparison rate is based on a $150,000 loan over 25 years. Warning: this comparison rate is true only for this example and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate. Rates correct as of . View disclaimer.

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