House prices could soar 15% this year: UBS

UBS predicts a push by investors could aid the surge in property values, with regulators unlikely to intervene until late this year.

A recent auction in Sydney. UBS says the return of investors to the market is one reason why the market will remain strong in the months ahead. Picture: Dylan Coker

House prices could rocket 15 per cent this year as investors push into the booming market, with APRA unlikely to intervene in the “up crash” until November, according to investment bank UBS.

The latest CoreLogic housing data, released on Thursday, showed national house prices are rising at the fastest pace in three decades amid expectations of an extended period of ultra-low rates.

CoreLogic’s monthly property price index revealed a 2.8 per cent national uplift over March, the fastest rate of growth since October 1988, when prices rose 3.2 per cent.

Credit availability, willingness to borrow, a shortage of houses and sentiment including “fear of missing out” - or FOMO - have combined to push house prices to fresh record highs, with the market now watching for APRA’s next move.

“The future expectation of low rates has given the market another leg up. People are thinking that over the next three to five years they’re going to have continued low interest rates, so their willingness to borrow more has increased materially,” UBS Australia chief economist George Tharenou told The Australian.

“They’re not thinking about the longer term implications of higher interest rates when policy eventually normalises.”

The Reserve Bank of Australia has repeatedly said it will not raise rates until 2024, providing a degree of certainty for borrowers stepping into the heaving market.

“That’s not permanent. At some point, those fixed rates will expire and the repayment schedule will go up,” Mr Tharenou said.

“But people are just looking at the near term, which is an expectation of ongoing house price gains. And that’s fuelling a willingness to borrow more now to pay ongoing higher prices.”

While first homebuyers and owner-occupiers dominated in the early phase of the up cycle, investors have suddenly started rushing in. This segment will once again be a key part of the housing boom, he predicted.

“The fundamentals of rental demand have not materially recovered, yet investors are returning to the market in significant amounts in recent months,” Mr Tharenou said.

“This directional change is the new story, and that’s why I think we’re going to see ongoing strength in house prices ahead.”

UBS Australia chief economist George Tharenou expects property price gains of 15 per cent this year. Picture: Hollie Adams

UBS has over recent months been predicting a 10 per cent rise in prices this year, but Mr Tharenou now sees risks to the upside and is forecasting gains of 15 per cent.

Despite house prices smashing records — Sydney prices surged 6.7 per cent over the quarter to be at fresh highs — policymakers will be reluctant to make any early moves for fear of spooking the fragile recovery, he said.

This is even as banks increase their lending to high-risk borrowers.

“You’re going to get another six months of strength in housing and loans, and higher-risk loan categories increasing further,” Mr Tharenou said.

“Then as we get on the other side of the JobKeeper cliff, unemployment will start to decline again and there’ll be an ongoing recovery in the economy. That’s the point at which policymakers will consider macro-prudential tightening.”

APRA will wait until October or November to make a move, he predicted.

The prudential regulator this week rejected calls for it to take action to slow the booming market, with chairman Wayne Byres saying it was not APRA’s job to “solve house prices” or “solve affordability”.

In the same breath he said the regulator was closely watching for any developments that signalled riskier lending by banks. A deterioration in lending standings was not currently evident, Mr Byres said.

But Mr Tharenou pointed to the latest lending figures, which show a jump in higher-risk categories.

“To make an assessment about lending standards you need to look at the total volume of lending. It’s gone up 70 per cent in nine months, which tells me there’s been a significant increase in demand and availability of credit.

“And then you look at the composition of that lending: there‘s been a significant increase in the high-risk loan categories, like higher debt-to-income and high loan-to-value ratio loans.”

The start of another up cycle comes as the federal government moves to repeal responsible lending obligations. This would further inflate the market, and “would not be helpful”, Mr Tharenou warned.

“Further policy support for the housing market right now is not necessary. It doesn’t need any more stimulus right now,” he said.

That may change next year if regulators intervene and the market starts to cool.

UBS expects 2022 will bring a much slower environment in terms of activity and price growth, as APRA steps in and housing supply meets demand. While a correction is a possibility, Mr Tharenou sees migration from overseas smoothing the landing.