Pimco is one of the world’s premier fixed interest income Managers. This article explains their view on the factors causing falling property values.
Tightening of Mortgage Availability
Mortgage availability has tightened due to property-cooling measures and closer bank scrutiny.
In 2014 requirements for Banks were introduced to:
- Reduce the annual growth rate of loans to individual real estate investors from 20% to 10%
- Limit interest-only loans to 30%, down from 40%
Post the Royal Commission, banks have raised their lending standards and serviceability requirements.
Rising Interest Rates
Mortgage rates are poised to rise because bank funding costs are heading higher.
The country’s total household debt stands at 140% of gross disposable income and mortgage payments are 38% of median pre tax income. If rates were to rise over time by 2%, this would increase the mortgage payments to 48% of pre tax income, making the affordability gauge near its worst level over the past two decades.
Principal & Interest VS Interest Only
The difference in interest rates between Interest Only loans and Principal and Interest loans has risen from 20bps (0.20%) to 80 bps (0.80%) in 6 months to early 2018.
A typical owner-occupier switching from an interest-only (IO) to a principal-and-interest (P&I) structure will see their monthly mortgage payment jump by about 40%, having a similar impact as a 2% rate rise.
Supply & Demand
The introduction of higher foreign investor stamp duty rates in Victoria and NSW resulted in a 66% reduction in foreign investment during the fiscal year to 30 June 20174 compared to the previous year.
However, the long term health of the housing market is now anchored by a relative balance between the slow down in physical supply and the demand generated from 1.25% annual population growth (Births and migration).
In broad terms, Pimco are not envisioning a housing market crash, rather expecting a fall of around 10% over the next couple of years.
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