UBS predicts further falls for Australian home prices

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There’s no shortage of analysts out there predicting that Australian home prices will continue to fall.

George Tharenou, Australia economist at UBS, is another.

He’s forecasting that tighter lending restrictions based on income and debt levels of borrowers, dubbed macroprudential tightening “phase 3”, will lead to further price declines this year.

“[This] is a game-changer that will materially further tighten credit ahead, with higher living expense assumptions and debt-to-income limits cutting borrowing capacity by around 30-40%,” he says.

“Indeed, housing is already weakening more quickly than our bearish view, with home loans dropping by around 10% since August last year, before the full Royal Commission impact.”

Tharenou says a “credit tightening scenario” is likely to unfold where home loans fall by around 20%, credit growth drops to flat and prices fall persistently.

“This, coupled with record housing supply in coming years and a slump in foreign buyers, sees us downgrade our house price outlook to fall 5% plus over the next year,” he says.

UBS

And this looks set to see the Reserve Bank of Australia (RBA) leave official interest rates on hold even longer, says Tharenou.

“Falling home prices will likely see a fading household wealth effect, seeing consumption moderate ahead as households becoming less willing to fund spending via running down savings,” he says.

“This will keep inflation contained and the RBA on hold until at least the second half of 2019, [with risks that it may be even longer] given it almost never hikes when house prices are falling.”

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