'RING THE BELL': UBS just called the top of the Australian building boom

(Photo by Three Lions/Getty Images)

Investment bank UBS is calling the top of Australia’s longest ever home building boom and expects new housing starts to fall next year with price growth set to “moderate.”

Housing commencements by the end of 2018 are seen dropping about 30% from their peak, which is in line with previous cycles, UBS economists led by Scott Haslem said in a note ominously titled “Housing outlook: ring the bell, we’re calling the top.”

The economists see house prices to climb 7% in 2017 and by as much as 3% next year, supported by population growth.

The UBS call comes as the Reserve Bank of Australia warns about financial stability risk from housing and the banking regulator APRA taking further steps to curb risk lending.

While RBA rate hikes, which usually trigger a housing slowdown, are not currently a factor, “mortgage rates are rising, and sentiment of home buying collapsed to a record low,” the economists said.

“Hence, we are calling the top, but stick to our forecasts for commencements to ‘correct but not collapse’.”

This chart from UBS shows dropping housing starts

A record 219,000 dwellings are under construction, but falling commencements now means new home supply will peak in the second half of this year rather than in 2018 as previously expected, UBS said.

After that, building activity will have a “sharp downturn” until end-2018. The lack of of RBA rate hikes reduces the likelihood the slowdown evolves into a full-blown crash, where starts fall to as low as 120,000, UBS predicted. It expected dwelling commencements of 200,000 in 2017 and 180,000 next year.

It was not all gloom though. UBS said while regulator induced mortgage tightening will dilute housing demand , interest rates will remain the dominant driver. The lack of RBA rate hikes along with a growing population will lend some support, it said.

This chart shows support from population growth

“A key consideration for a hard-landing for the housing market is signs of a crack in the labour market.” UBS said. Wage growth is still weak but the jobs market isn’t “cracking”, it said. Australia added more than 60,000 jobs in March in seasonally adjusted terms, the largest gain since September 2015, government data showed this month.

Regulators have been trying to cool the housing market as record house prices and multi decade low mortgage rates fueled a surge in household indebtedness. They fear this poses a risk to the stability of the nation’s financial system and the economy.

Housing affordability

Capital city dwelling values notched their fastest growth since May 2010, according to research firm CoreLogic. That has dented affordability and housing investment sentiment was near a record low, UBS said.

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