Housing affordability across major capitals has shown signs of improvement in recent months, helping homebuyers break into the market. However, as prices continue to rise, affordability could start to deteriorate as early as next year, according to an analysis by Moody's Investors Service.

New borrowers needed to allot a lesser share of their household income to meet mortgage repayment in recent months, indicating growth in affordability. In fact, the share of household income needed to service mortgage in Sydney fell by 3.8 percentage points to 30.5%.

Also read: Slump in land values could boost affordability

This improvement was due to the 4.3% decline in the city's median housing prices over the year to September. However, the New South Wales capital started posting monthly gains since July.

"Affordability improved by more in Sydney than any other major Australian capital city over the year, though Sydney remains the least affordable city for housing in Australia," Moody's Investor Service senior analyst Alena Chen said.

Melbourne had the same story — for new borrowers in the city to afford mortgage repayments, they had to apportion 26.9% of their household income, down from 29.3%.

During the same period, Melbourne housing prices declined by 1.5%. Also boosting affordability in the city was the 3.2% growth in average weekly incomes.

"Housing affordability for new mortgage borrowers improved on average in Australia because of mortgage interest rate cuts and housing price declines," Chen said.

Also read: Sydney and Melbourne on the rebound?

However, the housing price pick-up, particularly in Sydney and Melbourne, could indicate warning signs of weakening affordability.

"We expect housing affordability will deteriorate over 2020 as housing prices continue to increase. The risk of delinquencies and defaults in new mortgages will increase as affordability deteriorates," Chen said.

According to a separate report by the Housing Industry Association (HIA), Australia's housing market appears to be at its most affordable level in more than five years despite recording a rebound in prices over the recent months.

"The cuts to interest rates have more than offset the rise in home prices to ensure ongoing improvement in housing affordability," HIA chief economist Tim Reardon said.

He said the reduction in interest rates, despite not being passed on in full by the major lenders, has boosted the ability of households to service home loans.

"All these factors have combined in first home buyers' favour, resulting in this cohort accounting for almost a third of all new housing loans — a record high," Reardon said.