Housing affordability gets worse
Ross Greenwood: Well, today Moody’s Investor Services has come out and said the housing affordability has continued to deteriorate across 2017. This means that for those banks who were seeking to raise funds from overseas through residential mortgage back security, in other words, raising the capital to come in and fund housing lands here, they could potentially become more expensive. Alena Chen is with Moody’s Investor Services, she’s on the line right there, many thanks for your time Alena.
Helena Chang: Thanks for having me.
Ross Greenwood: Can you just explain in regards to this, you mentioned in this report that you believe housing affordability has deteriorated. What are the key factors for causing this deterioration?
Alena: It’s mainly driven by the growth in housing prices. When we compare a year ago, interest rates on average are down. Income growth has been moderate, but it’s generally up on average. What is driving the deterioration is housing prices.
Ross Greenwood: One of the things that’s taken me a bit is the report you came out with today. You said on average, now this is average, this isn’t Sydney, this isn’t Melbourne, not even Brisbane, but on average Australian households with two income earners. The 27.9% of their monthly income, submit monthly mortgage repayment.
I can remember the old days, I’m old enough Helena, that in the old days, if you were spending more than 30% of your income, even from a single person, a single income family, then the bank basically said, “Sorry, you can’t borrow anymore money,” but the truth is what this is saying. If that’s the average 27.9% from two income families, it says that many families are spending way over 30% of their income on their mortgage.
Alena: That’s right, our general assumption is the two income household. If it is someone who is, let’s say, employed, only part time or it’s only a single income household, that affordability measure would be much higher.
Curbs in place to slow lending
Ross Greenwood: Okay, you can see right now Helena that what the regulators and the authorities are doing to try and slow lending, they’re putting real curbs on the number of interest earning loans that are being issued in Australia. They also are starting to even put curbs on the number of investment loans or the pace of the growth of investment loans in Australia.
All of this does start to put something of a dampener on our own housing prices right across the country. Can you see it having an impact?
Alena: Yes, our view is that it will be pretty positive for RMBS in the long-term because it should serve to dampen housing prices. In the short-term however, what we see banks doing is to actually increase rates in response to these measures. That actually deteriorates housing affordability.
Ross Greenwood: In other words, it’s almost a vicious cycle as they’re trying to cool down the housing market, then what happens is they start to raise rates time, reducing the amount of speculative buying, but as they start to raise rates to reduce the speculative buying, it increases the lack of affordability for those people who wish to get into the housing market and perpetually also increases the prospect of defaulted some stage for the banks.
Alena: Yes, in the short-time, definitely it will serve to deteriorate housing affordability but our view is that these measures, in the long-term will help stabilize the housing market.
Ross Greenwood: It’s a really interesting conversation to have because especially with inflation rising in Australia today, the prospect of even higher interest rates from even potentially The Central Bank, The Reserved Bank by the end of this year or early next year.
Then you’ve got these other pressures in the housing market starting to slow down the interest and appetite of housing buys as well. Alena Chen is the Vice President at Moody’s Investor Service and certainly involved in that report today. Helena, as always we appreciate your time.
Helena: Thank you.