Australian housing affordability has "deteriorated significantly" over the last year, with Sydney's the worst in 14 years, increasing the default risk on home loans in residential mortgage backed securities, according to ratings agency Moody's.
The agency also warned that a recent string of out-of-cycle interest rate hikes by the big banks will put further stress on housing affordability once the jacked up rates take effect in November.
Households with two income earners spent an average 29.3 per cent of their monthly income on mortgage repayments in October, up from 28.2 per cent at the same time last year.
In Sydney, where house prices have surged over the last year, households spent an average of nearly 40 per cent on monthly mortgage repayments, up from 36 per cent a year ago.
Moody's said the sharp rise in monthly mortgage repayments was a credit-negative for residential mortgage backed securities (RMBS), home loans that are pooled into mortgage bonds and sold to investors.
"The current low mortgage interest rates have failed to offset the impact of rising house prices over the past year, and the implementation of interest rate hikes this month will further increase delinquency and default risks for mortgage loans," Moody's analyst Natsumi Matsuda said.
Moody's said the deterioration in housing affordability was credit negative for new mortgage loans and for RMBS backed by such loans.
"Specifically, the less affordable a mortgage becomes relative to household income, the higher the risk of delinquency and default," the agency said.
New mortgages in Sydney and Melbourne were "especially problematic", Moody's said, given the sharp increase in home prices over the last 12 months. Mortgages from the two cities account for around 45 per cent of loans in the Australian RMBS portfolio.
The Housing Industry of Australia today said the peak in the cycle of new home building had almost been reached, despite 200,000 home constructions forecast to be commenced over the coming year.
"This is an unusual situation - a peak in the market is normally followed by a relatively abrupt downturn," HIA said. "Higher variable mortgage rates from financial institutions are regrettable, while APRA-led credit rationing may unintentionally heighten the approaching downside risk to new home building."
The dire predictions for the RMBS sector come amid a substantial increase in the cost for non-banks to fund such securitisation processes, as concerns about China’s economic slowdown see offshore investors lose their appetite for funding local mortgage bond issuances.
Australia's largest non-bank Firstmac, which completed its second RMBS issue of the year last week, saw its funding costs increase 19 basis points from May on a $500 million issuance — half the size of the $1 billion package the lender sold earlier in the year.