This $2.5 trillion fund manager says Australian house prices will fall by another 10%

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  • Global bond giant Pimco – which has around $2.5 trillion in assets under management – expects house prices in Australia to fall by another 10%.
  • The Pimco analysts said a housing crash is unlikely, as supply and demand factors move back into balance. But they highlighted risks to consumption as lending standards tighten.
  • The average owner-occupier who is forced to switch into principal & interest repayments will need to spend almost half their pre-tax income on mortgage costs.
  • In addition, the risk that Australian banks could lose their AA- credit rating “is now higher than before”.

Australian house prices are likely to fall by another 10% “over the next couple of years,” says Pacific Investment Management Co (Pimco).

Analysts from the global asset manager said the catalysts are in place for further falls, but they don’t expect an outright housing crash.

It’s a view shared by analysts from both Commonwealth Bank and ANZ, who also predicted further price falls of around 10% in the major east coast markets.

“We do not envision a housing market crash in Australia that is severe enough to threaten broad financial stability,” the Pimco team said.

However, they added there’s now an increased probability that the big Australian banks could lose their AA- rating for the first time ever.

They also raised concerns about the outlook for domestic consumption, due to a negative wealth effect from falling prices and stricter requirements around debt serviceability.

In making their estimate of future price moves, the Pimco team highlighted the recent declines in auction clearance rates as a key factor.

“This signals reduced liquidity in the physical market, which often foreshadows further price declines.”

Offsetting that though, “the long-term health of the housing market is anchored by a relative balance in physical supply and demand,” Pimco said:

Pacific Investment Management Company

Australia also has the benefit of strong employment and population growth. And the recent downturn appears to have been “purposely induced” by regulators, which means they could also “soften their stance” in the event of a sharp correction.

Also, this isn’t a rerun of the US housing crash which gave rise to the 2008 global financial crisis. There’s less oversupply, less fraudulent lending practices and stricter standards on initial deposits.

And lastly, Pimco noted there’s a “strong social stigma” against defaulting on your mortgage in Australia.

However, multiple challenges remain evident, starting with the fallout from tighter lending standards in the wake of recent macro-prudential measures and the banking royal commission.

That means a pending wave of borrowers could well be forced to shift into principal & interest repayments, as banks refuse to refinance on interest-only terms.

Pimco said average mortgage repayments currently comprise around 38% of pre-tax income in Australia. For a typical owner-occupier switching from interest-only into principal & interest, that share will increase to 48%.

“This would bring the affordability gauge near its worst level over the past two decades, similar to that during the global financial crisis,” Pimco said.

In addition, the recent upwards pressure on bank funding costs is likely to increase. Higher funding costs have already led three of Australia’s big four lenders to raise mortgage rates.

“We believe US dollar liquidity will continue to tighten globally, and investors may start demanding higher credit premiums from Australian banks.”

The net result is that the RBA is likely to stay on hold for longer, Australian bond yields will remain range bound, while pressure on the banks will create a downside bias for the Australian dollar.

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