Moody’s Investors Service has undertaken a “sensitivity test” which has outlined the impact that changes in interest rates, property prices and household income would have on mortgage serviceability.
In its latest RMBS Australia report, Moody’s Investors Service has released the results of sensitivity tests it has undertaken to assess housing affordability.
The first sensitivity test, which assessed the impact of a 10 per cent change in property prices, found that the percentage of household income needed to meet mortgage repayments would change by 2.8 per cent on average in Australia, with Sydney the least affordable city (3.5 per cent in serviceability).
The second sensitivity test undertaken by Moody’s, which assessed the effect of a 5 per cent drop in household income, found that in such a scenario, the percentage of household income needed to meet mortgage repayments would increase by 1.5 per cent on average across Australia.
Conversely, Moody’s second sensitivity test also revealed that if average household income rose by 5 per cent, the percentage of household income needed to service a mortgage would decrease by 1.3 per cent.
Moody’s stated that Sydney borrowers would again be the worse for wear in such a scenario, with a 5 per cent decrease in household income resulting in a 1.8 per cent increase in the level of household income needed to meet mortgage repayments.
Further, the third sensitivity test undertaken by Moody’s, which sought to assess the impact of interest rate changes on mortgage serviceability, found that for every 25 basis point rise in rates, the percentage of household income needed to meet mortgage repayments would rise by 70 basis points on average across the country.
The ratings agency claimed that mortgage holders in Sydney would require the largest percentage (90 additional basis points) of their household income to service their mortgage following a 25 basis point rise in interest rates.
Housing affordability to “remain steady”
Moreover, in its report, Moody’s noted that it believes housing affordability pressures will remain stable over the next 12 months, claiming that higher mortgage rates would “counterbalance lower housing prices”, adding that “income growth will remain modest”.
Moody’s stated that such a scenario would be “credit neutral” for Australia’s residential mortgage quality, claiming that the influence that housing affordability would have on mortgage delinquencies would “remain steady”.
Moody’s also stated that in its view, housing affordability improved over the year to August 2018.
Moody’s stated that households with two income earners taking out a loan with an 80 per cent loan-to-value ratio (LVR) on average needed 27.6 per cent of their monthly income to meet monthly mortgage repayments in August, down from 28.7 per cent year-on-year, and below the 10-year average of 28.6 per cent.
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