Housing affordability is at its worst level in a decade and Australians face paying a record share of their take-home pay to cover mortgage repayments, as the Reserve Bank ties a possible pause in interest rate rises to weakness in the nation’s jobs market.
Research by ratings agency Moody’s Investors Service released on Wednesday showed despite a fall in house prices across the country, housing affordability deteriorated to its worst point since the global financial crisis in 2008.
The RBA estimates that by later this year mortgage repayments will likely account for a record 9.5 per cent of the total disposable income of all Australian households, including those without mortgages.
RBA governor Philip Lowe – the day after the bank lifted the official cash rate for a 10th consecutive time to an 11-year high of 3.6 per cent – said a pause in rate increases was getting closer but much depended on how the economy performed over coming months.
Since the RBA started lifting interest rates in May last year, repayments on a $604,000, 30-year home loan have climbed by 54 per cent or almost $1200 a month.
Moody’s research reveals that on average Australian households with two incomes needed 30.9 per cent of their income to meet monthly mortgage repayments in February. In May last year, when the RBA started lifting interest rates, they needed 26.4 per cent.
The worst capital city for affordability is Sydney where a dual-income couple needs 40.7 per cent of their pay to cover a new average-sized mortgage. Melbourne couples need 34.5 per cent, those in Adelaide need 31.1 per cent, in Brisbane the rate is 27.9 per cent while Perth is the most affordable capital at 19.3 per cent.
Moody’s analyst Si Chen said as the RBA lifted interest rates through 2022, affordability had deteriorated with no sign it would improve.
“Poor housing affordability increases the risk of delinquencies and defaults for new mortgages,” he said.
“More interest rate rises by the RBA will further push up mortgage lending rates and weigh on housing affordability for new borrowers.”
Lowe told the Business Summit that further rate rises would be dependent on key economic data, starting with job and inflation figures for February due in the next three weeks.
The jobless rate unexpectedly lifted to 3.7 per cent in January, but the bank believes this was due to a change in seasonal hiring patterns by businesses. Lowe said it appeared about 100,000 people had indicated they were about to start a job within the next four weeks.
Lowe said if there were signs rate rises were starting to bring down inflation and weigh on the job opportunities for all Australians, then the bank may be in a position to pause.
“They are important pieces of data that we can look at before the next board meeting. If they suggest the right thing is to pause we will do that, but if they suggest we need to keep going, we will do that,” he said.
Lowe, who has agreed to a meeting with Suicide Prevention Australia and Lifeline to discuss the mental health toll caused by higher interest rates, said the bank was worried about the damage caused by elevated inflation.
“Inflation is still too high and while it looks to be on a declining path it is likely to remain higher than target for a few years. If we don’t get inflation down fairly soon, the end result will be even higher interest rates and more unemployment,” he said.
Treasurer Jim Chalmers said the RBA’s rate rises were forcing many households to reduce their spending.
He said the May budget would focus on three areas, including cost-of-living relief, to help people deal with the high rate of inflation.
“[We’ll be] showing restraint in the budget at the same time as we find room to invest in our economic capacity at the same time as we provide that cost-of-living relief, these are all equally important parts of a three-point plan to get on top of this inflation challenge in our economy.”
Andrew Ticehurst, senior economist with consulting firm Nomura Australia, said the fate of the next rate rise was tied to the March 16 jobs report from the Bureau of Statistics.
“If employment growth rebounds this month, as seems likely, then we likely remain on track for another 25 basis point hike in April,” he said.
Financial markets still expect the official cash rate to reach 4 per cent by September.
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