UBS: Australia’s Housing Boom Is ‘Officially Over’

Melbourne-PropertyThe housing boom that has seen Australian home prices more than double since the turn of the century is “officially over,” after data showed prices now flatlining, UBS Group AG said.

National house prices were unchanged in October from September, while annual growth has slowed to 7 percent from more than 10 percent as recently as July, CoreLogic data released Wednesday showed. “There is now a persistent and sharp slowdown unfolding,” UBS economists led by George Tharenou said in a report.

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth via a fading household-wealth effect.”

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An end to Australia’s property boom will be welcome news for first-time buyers, who have struggled to break into the market after surging prices propelled Sydney past London and New York to be the second-most expensive housing market. Less impressed may be property investors, already squeezed by regulatory lending curbs that drove up mortgage rates.

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The cooling housing market may encourage the Reserve Bank to keep interest rates at a record low. A rate hike would be undesirable as it would put further downward pressure on dwelling prices, said Diana Mousina, senior economist at AMP Capital Investors.

CoreLogic head of research Tim Lawless said, “The slowdown in the pace of capital gains can be attributed primarily to tighter credit policies which have fundamentally changed the landscape for borrowers.”

The Australian mortgage market has “ballooned” due to banks issuing new loans against unrealised capital gains of existing investment properties, creating a $1.7 trillion “house of cards”, a report earlier in September warned.

The report, “The Big Rort”, by LF Economics founder Lindsay David, argues Australian banks’ use of “combined loan to value ratio” — less common in other countries — makes it easy for investors to accumulate “multiple properties in a relatively short period of time despite high house prices relative to income”.

“The use of unrealised capital gain (equity) of one property to secure financing to purchase another property in Australia is extreme,” the report says.

“This approach allows lenders to report the cross-collateral security of one property which is then used as collateral against the total loan size to purchase another property. This approach substitutes as a cash deposit.

“This has exacerbated risks in the housing market as little to no cash deposits are used.”

Experts have warned that one in four mortgaged households are currently in stress, and modelling suggests if interest rates rose by just 0.5 per cent, that would jump to one in three households.

In August, a young Sydney couple revealed how they had racked up AUD1.2 million in debt on a portfolio of five properties in just two years.

Roy Palleson and Rowena Ebona, appearing on the ABC’s Four Corners, said they had no concerns about their debt — nearly 10 times their combined income of AUD135,000 — and were hoping to expand their portfolio to 20 investment properties “initially”.

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