- Since the beginning of the nineties, the earlier mortgage payments in Australia have always been followed by RBA interest rate cuts.
- Such a scenario is unlikely this time, with rates that are already at a low point. In addition, banks are tightening borrowing standards and credit growth is decreasing
- UBS says that this increases the risk that the current downturn will continue next year, with further price decreases of 5% or more.
As far as the fall in the housing market is concerned, the recent declines in the property market in Australia have so far been relatively tame.
Prices have dropped nationally by about 2% since September 2017 from peak to off peak – below the historical average of 4% in the seven recessions since 1982.
The current downturn also differs in terms of length – it has been running for 11 months, while previous decreases have lasted only 12 years on average.
And according to the UBS economic team, these will probably last until next year. Because unlike previous downturns, this will not be followed by a rate cut by the RBA.
So when it comes to the prospects for house prices, "this time is different".
"History reflects that the RBA almost always made interest rate cuts soon after house prices began to decline, with an average 9-month delay," UBS said.
"Lower interest rates have quickly promoted affordability and led to a strong increase in demand." With lenders willing to provide credit, it saw a rebound in home loans, which then quickly lifted prices. "
Since the beginning of the 1990s, interest rates in Australia have fallen from around 18% to the current record low of 1.5%.
In that sense, the RBA therefore has limited room for maneuver, since certain policy institutions are already accommodative.
But UBS added that neither the RBA nor the regulator of the banking business, APRA, seem to be in any hurry to give the property a boost this time.
To begin with, RBA governor Philip Lowe stressed last week that a slowdown of the main real estate markets on the east coast is not necessarily a bad thing.
And although it does not outline a specific target, APRA has said that it expects banks to apply stricter standards in the area of loans, including higher ratios between debt and income and stricter expense audits.
The net result is that, in addition to the absence of interest rate cuts, the headwinds to credit growth remain clear, which should serve to further reduce the appreciation of house prices.
In comments to the parliament last week, Lowe noted that the average variable interest rates have declined over the past year, which he believes was a dynamic that was inconsistent with slower credit growth.
But UBS does not agree with this and observes that the recent fall in mortgage interest rates is smaller than in previous cycles.
"We also argue that, given the current record low" credit ", this downturn of the property was uniquely not preceded by a higher contraction of the & # 39; question & # 39 ;, but rather reflects the stricter credit offer, as macroprudential policy tightening & the Royal Commission combine to significantly reduce borrowing capacity, "said the analysts.
Recent data from the ABS show that credit growth is clearly slowing down, particularly as a result of a particularly sharp decline in investor loans
Looking ahead, we still expect that there will be an increasingly tight phase of credit availability to see a cumulative decline in loans of around 20%, "said UBS.
"We think that this is likely to continue to drag prices and see a decline of 5% + the following year."
The analysts also pointed to possible policy changes in the event that Labor wins the government, including limits for negative gearing and capital gains tax concessions.
Such a result "can point to a more negative view than we expect".
"If this also caused house price expectations to become negative, then the risk would be to widen the weakness in the demand to spread to owner-occupiers who are currently resilient," according to the analysts.
"Given the likely lack of policy easing in the next cycle, house prices are likely to continue to decline in the coming year, given the longest recession in many decades."
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