Mortgage availability has tightened thanks to property cooling measures putting downward pressure on housing prices, a new report says.
In its October 2018 Viewpoint report, Pimco warns mortgage serviceability is expected to deteriorate due to rising mortgage rates as bank funding costs head higher, combined with the policy-induced switch from interest-only to principal-and-interest loans.
“We expect housing prices to continue to fall moderately by about 10 per cent over the next couple of years," Pimco said in its report.
"We estimate that a 200 basis point increase in Australian mortgage rates, a commonly adopted stress-test assumption at mortgage origination, could increase mortgage payments from 38 per cent of pre-tax income to close to 48 per cent."
Last month Corelogic data revealed increasing rates which had previously impacted the investor market segment was now affecting owner-occupiers.
Australia’s total housing debt stands at 140 per cent of gross disposable income and mortgage payments are 38 per cent of median pre tax income.
Mortgages represent two-thirds of bank lending in the country so changes in the housing market directly affect the credit profile of banks.
Pimco anticipates the out-of-cycle mortgage rate hikes by banks will keep the RBA on hold for longer.
“This underpins our view that the new neutral rate in Australia is low, around three per cent, compared with the RBA’s estimate of 3.5 per cent."
However, it’s not all bad news. Australia’s long-term housing market health is anchored by a relative balance in supply and demand factors.
“We do not envision a housing market crash in Australia that is severe enough to threaten broad financial stability.
“Nationwide run-rate housing supply has come down from two years ago and is now roughly on par with run-rate housing demand. Moreover, the surplus supply of the past few years can be offset by the deficit accumulated over the decade since the global financial crisis.”
Australian housing demand is bolstered by healthy population growth of about 1.25 per cent annually, with approximately equal contributions from natural growth and net overseas migration.