Login
ISCOVER
Despite falls in house prices over the last year, rising mortgage costs will continue to impact affordability, according to a new report.
According to a new report by global asset manager PIMCO, rising wholesale funding costs for retail banks — on top of subdued income growth, cost of living pressures and high mortgage repayment costs for borrowers that were issued with home loans prior to regulatory tightening around interest-only loans — will continue to impact housing affordability, despite continued declines in house prices over the last year.
To continue reading the rest of this article, please log in.
Looking for more benefits? Become a Premium Member.
Create free account to get unlimited news articles and more!
Looking for more benefits? Become a Premium Member.
The company also expressed its concern about the outlook for domestic consumption due to a negative wealth effect from falling house prices and tighter lending standards, especially around income and living expenses.
“It is not news that Australian housing affordability is stretched,” PIMCO analysts said in a report to clients.
The asset manager estimated that 38 per cent of Australians’ pre-tax income is directed towards their mortgages, but if a 200 basis point increase is applied to mortgage rates, this proportion could blow out to 48 per cent. If this occurs, affordability could reach levels seen during the global financial crisis, according to PIMCO.
“We expect mortgage serviceability will deteriorate further due to rising mortgage rates as well as the policy-induced switch from interest-only to principal and interest loans,” the PIMCO report stated.
Despite the Reserve Bank keeping the cash rates on hold for 26 consecutive months, debt servicing costs have been rising, with three of the four major banks and a long line of non-bank lenders lifting mortgage rates in response to higher wholesale funding costs, the asset manager noted.
“We believe US dollar liquidity will continue to tighten globally, and investors may start demanding higher credit premiums from Australian banks,” the company said.
PIMCO also warned of the higher probability that the major banks could lose their AA- rating for the first time ever.
“We have grown more cautious with the external credits of Australian banks,” the company said.
Similar to predictions by AMP Capital, Commonwealth Bank and ANZ, PIMCO expects house prices to fall by another 10 per cent in major east coast markets by 2020, with the recent declines in auction clearance rates signalling further drops in prices.
“This signals reduced liquidity in the physical market, which often foreshadows further price declines,” it said.
However, the asset manager does not expect a crash landing where house prices drop by 20 per cent or more.
“We do not envision a housing market crash in Australia that is severe enough to threaten broad financial stability,” the asset manager said in its report.
Australia has strong employment and population growth, PIMCO noted, and the recent housing slump appears to have been “purposely induced” by regulators, which means they could also “soften their stance” in the event of a sharp correction.
Further, it claimed that there is less oversupply, less fraudulent lending practices, tighter standards on initial deposits and a “strong social stigma” against defaulting on your mortgage in Australia, which reduces the likelihood of an outright housing crash.
The asset manager believes that “the long-term health of the housing market is anchored by a relative balance in physical supply and demand”.
This is in line with a report by the Housing Industry Association released earlier this year which suggested that if the nation’s population continues to increase at the current rate of 1.6 per cent per year, and household income remains relatively stagnant, an average of 215,123 homes would need to be built every year until 2050 to reach a balance between supply and demand. This is compared to the “record” 233,544 dwellings built in 2016.
The residential housing industry body further noted that in 2017–2018 — during which new dwelling commencements across Australia exceeded 217,000 — the supply and demand for new homes are at the “closest to equilibrium as [they have] been in the last 15 years” on a national level.
Federal Treasurer Josh Frydenberg said that the housing downturn is “healthy for the economy”.
“What we have seen is the prices come back to a more sustainable level,” the Treasurer told media in Sydney on Tuesday (2 October).
“This is healthy for the economy. This is what the Reserve Bank had wanted. This is what APRA, the prudential regulator, had intended when it tightened investor loans.”
Mr Frydenberg said that the government would need to “be very careful” when implementing the recommendations of the financial services royal commission to ensure “competition is maintained and Australians get access to credit in a way that doesn’t harm the economy”.
[Related: Non-majors drop interest rates]
