Moody’s Ratings has warned that further rate hikes and stubbornly high prices will consequently stretch new borrowers and lift mortgage risks.
Moody’s Ratings, which assesses credit risk across banks and securitisation markets, has turned the spotlight on housing affordability in a new report, saying that the combination of higher interest rates and still‑elevated prices will strain new home buyers.
In its report, Rising interest rates, high house prices will heighten affordability risks, Moody’s measured affordability as the share of average monthly household disposable income needed to service repayments on a typical new mortgage.
On this measure, affordability had already worsened by March, with the national ratio sitting at 29.6 per cent of disposable income, up from 28.6 per cent in December 2025 and 29.1 per cent a year earlier.
Moody’s noted that conditions were particularly stretched in Sydney, where new borrowers needed 40.4 per cent of disposable income for mortgage repayments in March.
This is compared with 31.7 per cent in Brisbane, 28 per cent in Adelaide, 25.4 per cent in Perth, 23.9 per cent in Melbourne, 23.3 per cent in Hobart, and 20.9 per cent in Darwin.
The agency made clear that it expected affordability to deteriorate throughout 2026.
“Over the rest of 2026, we expect our measure of housing affordability to continue to worsen because of rising interest rates and high housing prices,” the report read.
Cash‑rate path shapes repayment outlook
To illustrate how monetary policy could feed into mortgage stress, Moody’s released scenarios around a potential rise in the cash rate to 4.6 per cent this year.
Under a scenario where the cash rate reached 4.6 per cent and dwelling values remained unchanged, the agency concluded that repayment burdens would rise noticeably.
“Our affordability measure will worsen to 31 per cent if housing prices do not change,” it said.
The report then explored how price movements could offset or amplify that pressure.
In a downside scenario for prices, Moody’s judged that a 6 per cent fall in house values at a 4.6 per cent cash rate would effectively freeze affordability at current levels.
However, it cautioned that a renewed upswing in prices would push borrowers into uncomfortable territory.
In its upside‑price scenario, the agency warned that “a 6 per cent housing price gain would raise the affordability measure to 32.9 per cent”.
Tight supply, uneven markets
Alongside these repayment metrics, Moody’s stated that it did not expect a broad-based drop in values despite higher borrowing costs.
The report stressed that population growth, fuelled by high migration, was colliding with constrained construction activity.
“New housing supply remains low compared with current population growth levels, with high construction costs inhibiting new housing builds,” the report noted.
Against that backdrop, Moody’s said it expected rate hikes and cost‑of‑living pressures to take some heat out of the market without fully unwinding recent gains.
“We expect prices will overall remain elevated over 2026, because population growth from steady migration, together with tight supply, will keep demand strong,” the report read.
Within that national picture, the agency anticipated that some cities would stall and pointed in particular to Melbourne.
“While we expect housing prices to overall stay high, there will be pockets of weakness, with the Melbourne property market likely to continue to lag other major cities,” Moody’s said.
First home buyers, investors, and RMBS risk
The report said first home buyers (FHBs) would remain an important source of activity but emphasised that many in the cohort were taking on large debts relative to their deposits,
“A high proportion of first home buyers have mortgages with loan-to-value ratios (LTV) that exceed 80 per cent, which means these borrowers have much higher mortgage repayments than those with lower LTV loans,” the report read.
It also noted that investor behaviour was being influenced by the rental market, which had tightened sharply over recent years.
Looking at that segment, Moody’s said that “strong rental growth over the last five years and low national rental vacancy rates are drawing investors to the housing market, though we expect demand from investors to slow somewhat as mortgage interest rates rise”.
Bringing these threads together, the agency concluded that the combination of higher interest costs, raised entry prices, and heavily leveraged new borrowers was incrementally raising credit risk in securitised mortgage pools.
[Related: Home Guarantee expansion fuels low-deposit lending surge]
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