Risks of mortgage defaults in Sydney and Melbourne are growing as soaring house prices are matched with bigger loans and deteriorating affordability, ratings agency Moody's warns.
Housing affordability has eroded in Australia's two biggest cities during the past year, as house prices rose sharply while wages remained flat.
Sydneysiders living in two-income households are spending 35.1 per cent - or more than a third of their income - on mortgage repayments, while Melbourne households are spending 28.2 per cent, Moody's Housing Affordability Measure found.
Sydney households with only one income earner would be spending more than 70 per cent to pay the mortgage, which is not sustainable, Moody's says.
Less affordable mortgages increase the risk of default and delinquency and these risks will grow when interest rates rise from their current lows to more normal levels, Moody's says.
The average standard variable mortgage rate currently sits at 5.65 per cent, but the 10-year average is 7.18 per cent, the ratings agency said.
"The larger loan sizes and repayment obligations of new mortgages in Sydney and Melbourne are especially problematic since these mortgages are being underwritten at historically low interest rates," the report said.
"Borrowers who took out loans at historically low interest rates are at a greater risk of not being able to afford repayments when interest rates eventually rise."
Applying various stress scenarios, including further gains in house prices, rising interest rates and falls in household income, Moody's found that Sydney would suffer the worst deterioration in housing affordability of all the capital cities.
Nationally, housing affordability remained steady over the past year with households spending 27 per cent of their income to repay their mortgages - lower than the 10-year average.
Affordability improved in Perth and Brisbane and remained steady in Adelaide.
PAYING OFF A HOME LOAN AROUND AUSTRALIA
* National average, 27 per cent of income in March 2015, unchanged from March 2014
* Sydney, 35.1 per cent, up from 32.8 per cent
* Melbourne, 28.2 per cent, up from 27.5 per cent
* Brisbane, 23.4 per cent, down from 24.4 per cent
* Perth, 21.9 per cent, down from 24.6 per cent
* Adelaide, 22.1 per cent, unchanged