UBS: Australia's housing market is showing 'remarkable resilience'

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Australian house price growth remains “relatively solid” according to UBS, despite the impact from the latest macro-prudential regulations introduced in March.

Those measures put a cap on interest-only lending to 30% of all new loans, down the previous ratio closer to 40%.

As the chart below from UBS economist George Tharenou shows, interest-only lending has indeed fallen in line with the 30% limit.

Growth in interest-only lending is now the lowest since the March quarter in 2009, which was the market trough in the fallout from the global financial crisis.

The chart also shows a decline in loans with a 90% loan-to-value (LVR) ratio — where the loan comprises 90% or more of the value of the property.

Here’s Tharenou on the fall:

APRA also told lenders to place strict internal limits on interest-only loans with an LVR >80%. Hence, there has also been a further easing in high 80%+ LVR loans to a share of ‘only’ 21%, which is at least a decade low (particularly 90%+ LVR down to a 7% share).

While the latest round of regulations have had the intended effect of restricting credit growth, Tharenou noted that residential building approvals have held up better than expected.

In addition, house price growth remains steady although Tharenou expects prices to continue cooling towards the end of the year.

“National dwelling price growth also remains relatively solid in Aug-17 at 8.9% year-on-year, but this is still the slowest since Feb-17, and monthly growth is now almost flat,” Tharenou said.

He expects prices to continue moderating towards the UBS year-end of forecast of 7% annual growth.

“Importantly however, we still expect the lagged impact of macro-prudential policy to tighten lending conditions and slow housing, especially given the interest-only share is still only just at the regulators cap, and our banks team think it needs to fall further,” Tharenou said.

But Tharenou said that the impact of macro-prudential measures, Australian housing has been “remarkably resilient”.

He added that if Australian house prices maintain their current rate of growth, then further macro-prudential measures may be utilised, although not until next year.

Resilient house price growth may also give rise to an “early” interest rate hike by the Reserve Bank of Australia.

UBS is currently forecasting rates to stay on hold for the next 12 months, with an increase expected in the fourth quarter of 2018.

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