Despite record-low interest rates, housing affordability deteriorated in all major capital cities over the five months to February 2021, with the main cause said to be a 4.7 per cent incline in housing prices and a 1.9 per cent decline in incomes, Moody’s Investor Services said in a new report.

According to Moody’s, Aussies households needed 24.6 per cent of their monthly income to meet monthly mortgage payments on new loans in February, up from 23.0 per cent in September.

But despite the apparent deterioration in housing affordability, the current share remains below the 10-year average (26.1 per cent) and well under the high point for the past decade in April 2011 (30.7 per cent).

So, while affordability will continue to deteriorate as prices rise in 2021, Moody’s doesn’t expect the 2011 peak to be breached.

“Our model shows that housing prices or interest rates would have to increase materially (by 24.9 per cent or 225 basis points, respectively) for affordability to deteriorate to its worse level in a decade. A 15 per cent increase in housing prices combined with 100 basis point increase in interest rates would have the same impact,” says Pratik Joshi, a Moody’s analyst.

On the upside, Moody’s expects the growth in housing prices to slow. While tipping prices to continue to grow this year, the ratings agency conceded that the pace will be slower than recent months.

Moody’s, however, predicted a decline in household incomes when government support measures like JobKeeper end in March, but assured that this will be reversed when economic recovery gathers momentum in the second half of 2021.

Looking back at the past five months, housing affordability deteriorated in all major Australian capital cities, but remained better than the 10-year average for each city.

Moody’s research pinpointed Sydney as the least affordable city in Australia for housing, with new buyers needing 31.3 per cent of household income to meet mortgage repayments in February 2021.

Melbourne is the next least affordable city (27.1 per cent of household income to meet mortgage repayments), followed by Adelaide (20.1 per cent), Brisbane (19.9 per cent) and Perth (16.5 per cent). Housing prices increased strongly in all five cities over the five months to February 2021.

According to Moody’s modelling, for every 10 per cent change in housing prices, the percentage of income households need to meet mortgage repayments changes by 2.5 percentage points on average in Australia.

However, extinguishing panic, Moody’s assured that for housing affordability to deteriorate so that it is worse than at any point in the last 10 years, Australian housing prices would have to increase an average 24.9 per cent. Looking at the individual cities, prices would have to increase 18.3 per cent in Sydney, 20.4 per cent in Melbourne and 38.9 per cent in Brisbane.

Adding further assurance, Moody’s modelled affordability based on possible rate rise scenarios, noting that to reach the 10-year unaffordability level, mortgage interest rates would have to increase to 5.9 per cent for Australia on average, or 5.3 per cent for Sydney, 5.5 per cent for Melbourne, 7.0 per cent for Brisbane, 9.0 per cent for Perth and 7.1 per cent for Adelaide.