UBS now thinks the housing downturn could be 'the longest in decades'

Going, going… Picture: Getty Images
  • UBS, like many forecasters, thinks Australian home prices will continue to ease by around 5 to 10% in the years ahead.
  • It now says the risks to its forecasts are to the downside, citing the impact of limits on high debt-to-income borrowing and a potential change in government at Australia’s next federal election.
  • The bank says this means the downturn could be the “longest in decades”.

Australian home prices have fallen for 11 consecutive months, and will likely decline again in September based on weekly figures released by CoreLogic earlier this week.

While mild by historic standards, the current downturn is showing few signs of abating, leading many to ask as to how long, and how big, it will eventually be.

There’s no shortage of forecasters out there predicting further declines, ranging in scale from a mild and short cyclical downswing to those who believe that prices will crash.

Although it’s not predicting the latter outcome, UBS’ Australian economics team has long thought that prices will remain under pressure for some time to come.

However, it now thinks the housing downturn could end up being more severe than what it initially thought, meaning this downturn could end up being the longest in several generations.

“We’ve long expected the value of home loans to drop by a cumulative 20%, which is the main driver of home prices, which consequently will likely fall 5% plus,” says George Tharenou, Economist at UBS.

“We expect further credit tightening, and the RBA’s lack of willingness to cut rates this time, to see the longest house price downturn in decades.”

Given those headwinds, Tharenou says there’s a risk that home loans could fall by as much as 30%, potentially seeing credit growth fall to zero. Under such a scenario, he says that could also see home prices decline more than his current forecasts of 5 to 10%.


While much of the recent focus has been on the introduction of limits on high loan-to-income borrowers, Tharenou says it is curbs on lending to high debt-to-income borrowers — those already carrying substantial amounts of debt — that could exacerbate the downturn in the housing market, particularly in markets with high housing valuations such as Sydney and Melbourne.

“We believe APRA may want [borrowers with a debt-to-income of greater than six times] down to around a 10% market share, far below our current estimate of around 33%,” he says.

“[This] could sharply cut borrowing capacity for anyone with existing debt.”


Tharenou also says this could mean the end of the “multiple property ownership model” whereby borrowers used capital gains on existing properties to secure finance to buy additional investment properties.

“The much bigger negative impact of DTI limits will be on the ‘model’ of investors buying multiple properties,” he says.

“Comprehensive credit reporting (CCR) and responsible lending will require lenders to verify all debt.

“This will impact borrowers who previously diversified investment property borrowings across multiple lenders and didn’t self-declare back to the original lender, but which will now be visible under CCR.”

He says this means households, even those with above average incomes, are likely to find it “materially more difficult over the next year or so to purchase an investment if there is an existing mortgage”.

On Monday, the Australian Financial Review reported that Westpac, Australia’s second largest home loan lender, had sent letters to some of its home loan customers telling them they had less that one month to find another lender amid growing concerns about the impact of rising rates, falling values and oversupply.

The letter — as yet unverified — was reportedly sent to interest only borrowers with multiple properties and high loan to value, usually 80%, or above.

Westpac has denied the letter exists, stating that “based on the limited information we have been provided, the statements made are incorrect”.

Along with a potential change in government at the next federal election, raising the prospect the Labor Party could limit negative gearing to new dwellings and halve the capital gains tax concession to 25% on property sales, it explains why Tharenou sees downside risks to his house price forecasts.

“The introduction of DTI limits and removal of negative gearing would likely be a further drag on investor loans for established housing,” he says.

“While investors wanting to enjoy negative gearing could shift to new housing, lending for established is now around 10 times larger than new. Hence, we doubt a rise in loans for new dwelling purchases could offset the fall in established.”

And while he admits the outlook for the housing market does have some positives, pointing out that economic growth has strengthened, unemployment has fallen and population growth remains strong, Tharenou says there’s also a risk that persistent price falls could dissuade borrowers less impacted by lending restrictions to hold off property purchases on the basis there’s further downside to come.

“[If] this weakens previously resilient sentiment and demand, seeing larger home prices falls of more than 10%, it could see the reversal of the big boost to consumption seen in recent years from the household wealth effect, hence raising the risk of an economic downturn and a credit crunch,” he says.

It’s a bearish outlook compared to that offered by more optimistic forecasters. However, Tharenou is not alone in thinking this downswing in prices could end up being the longest in modern Australian history.

Lat month, Paul Dales, Australia and New Zealand Chief Economist at Capital Economics, said prices could fall for years rather than quarters or months.

“With the full effect of the tightening in credit criteria and recent hikes in mortgage rates yet to be felt, we suspect this downturn will end up being both the longest and deepest with prices falling by 12% over four years,” he said.

So an elongated, and somewhat shallow price correction, rather than a crash as some more pessimistic forecasters are predicting.

As such, Dales says this long but mild downturn will probably result in household caution and the prospect of a deceleration in economic growth.

Overall, a 12% fall in house prices spread over four years is unlikely to cause too many problems,” he says.

“But by prompting households to spend more cautiously, it will probably contribute to GDP growth being closer to 2.5% over the next few years rather than the rates of 3.0% or more the RBA is banking on.”

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