Though housing affordability deteriorated in the year to March, it improved in the last quarter and could improve further following the recent rate cut.

Australia’s housing affordability deteriorated in the year to March, but improved in the last quarter of the year and is down from the 10-year average. The recent rate cut could also go some way to improving affordability, so long as it doesn’t push prices much higher.

In the year to March 2016, homeowners were required to spend a larger proportion of their income on monthly mortgage repayments, according to Moody's Investors Services.

Housing affordability deteriorated in all capital cities, except Perth, says the investment ratings agency.

Natsumi Matsuda, a Moody's Analyst, said Australians paid 27.6% of their income on mortgage repayment in the year to March.

"During the 12 months to 31 March 2016, Australian households spent an average of 27.6% of their monthly income on mortgage repayments, up from 27.0% for the 12 months to 31 March 2015," she said.

"Nevertheless, housing prices fell during the three months to 31 March 2016, suggesting that repayment costs may have peaked," said Matsuda.

The investor ratings agency pointed out that the 3 May rate cut will improve housing affordability, though the extent of the improvement will depend on the flow-on effects to the housing market. Lower rates might push house prices higher, which would cancel out the benefits of lower interest costs.

The analysis is contained in Moody's report ‘RMBS - Australia: Housing Affordability Has Deteriorated, but Worst May Be Over.'

The report said affordability improved in all capital cities during the three months to March 2016, but was not sufficient to erode the full-year deterioration.

Sydney remains the least affordable city, with households spending an average of 35.6% of their income on mortgage repayments as of 31 March 2016.

Households in Melbourne spent an average 30% of monthly income on mortgage repayments compared with 27.2% a year ago.

Affordability also deteriorated in Adelaide (to 23.2% from 21.9%) due to higher prices and lower incomes, and in Brisbane (to 24.3% from 23.6%).

Affordability actually improved in Perth (to 21.5% from 22.6%), due to a decline in home prices, and despite household incomes falling.

Affordability around the nation remains better than the average for the past 10 years.

Poor affordability raises the risk of delinquency and default. These risks will increase further if mortgage rates rise from their current historic lows.

Source: CoreLogic