Interest rates are hurting

Despite the Reserve Bank of Australia holding the official cash rate steady at 1.5%, debt servicing costs continue to rise, prompting lending institutions to raise their own rates.

In a report on The Sydney Morning Herald, Pimco analyst Taosha Wang said out-of-cycle hikes will ultimately hurt Australian households, leaving them with no choice but to allocate a higher portion of their budgets to mortgage repayments.

Wang approximates that a 200 basis points increase in mortgage rates could lead repayments to take up almost half of an average pre-tax income.

Three of the banking heavyweights save the National Australian Bank have already raised their rates, not to mention many of their other smaller counterparts.

With borrowers facing more difficult access to credit and a slowing housing market, Wang believes the central bank will be careful with regards to raising rates. She also said the housing downturn has increased the likelihood of debt downgrades for Australia's biggest banks.

"We have grown more cautious with the external credits of Australian banks. The probability of a market-moving agency downgrade that causes major banks to lose their AA- rating for the first time in history is now higher than before," Wang said.

For Wang, home prices will continue to decline by as much as 10% over the next couple of years due to the slump in auction clearance rates. She did note, however, that the country "lacks the preconditions for a housing market crash."