- Since the start of the 1990’s, previous housing downturns in Australia were always followed by RBA rate cuts.
- Such a scenario is unlikely this time, with rates already at record lows. In addition, banks are tightening lending standards and credit growth is slowing
- UBS says this raises the risk that the current downturn will continue into next year, with further price falls of 5% or more.
As far as housing downturns go, the recent declines in Australia’s property market have been relatively tame so far.
Prices nationally are down by around 2% since September 2017 from peak-to-trough — below the historical average of 4% in the seven downturns since 1982.
The current downturn also differs in terms of length — it’s already been going for 11 months, while previous declines have lasted an average of just 12.
And according to the UBS economics team, those falls are likely to extend into next year. Because unlike previous downturns, this one won’t be followed by a rate cut from the RBA.
So when it comes to the outlook for house prices, “this time is different”.
“History reflects the RBA almost always cut rates soon after house prices began falling, with an average lag of 9 months,” UBS said.
“Lower interest rates quickly boosted affordability, driving a sharp increase in demand. With lenders willing to provide credit, it saw a rebound of home loans, which then quickly lifted prices.”
Since the early 1990’s, interest rates in Australia have come down from around 18% to the current record-low of 1.5%.
So in that sense, the RBA has limited room to move anyway given policy settings are already accommodative.
But UBS added that neither the RBA, nor banking regulator APRA, appear to be in any rush to give property a boost this time around.
For one thing, RBA governor Philip Lowe highlighted last week that a slowdown in the major east coast property markets isn’t necessarily a bad thing.
And while not outlining a specific target, APRA has said it expects banks to enforce stricter lending standards, including higher debt-to-income ratios and more rigorous expense testing.
The net result is that along with the absence of rates cuts, headwinds to credit growth remain evident, which should serve to further compress house price appreciation.
In comments to parliament last week, Lowe noted average variable interest rates have declined over the past year, which he said was a dynamic inconsistent with slower credit growth.
But UBS disagrees, noting that recent mortgage rate declines are smaller than previous cycles.
“We also argue that given the current record low ‘price’ of credit, this housing downturn was uniquely not preceded by higher rates crimping ‘demand’, but rather mostly reflects tighter credit ‘supply’, as macroprudential policy tightening & the Royal Commission combine to materially reduce borrowing capacity,” the analysts said.
Recent data from the ABS shows credit growth is clearly slowing, led by a particularly sharp decline in investor loans
Looking forward, we still expect an ongoing tighter phase of credit availability to see a cumulative drop in loans of around 20%,” UBS said.
“We believe this is likely to continue to drag on prices and see falls of 5%+ over the next year.”
The analysts also highlighted potential policy changes in the event that Labor wins government, including limits to negative gearing and capital gains tax concessions.
Such an outcome “could point to a more negative outlook than we expect”.
“If this also caused house price expectations to turn negative, the risk would then be a broadening of weakness in demand to spread to owner-occupiers which are currently resilient,” the analysts said.
“Given a likely lack of policy easing in the coming cycle, home prices will probably keep falling into next year, seeing the longest downturn in many decades.”
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