Housing outlook to be worst in decades, UBS warns

The housing market is set for its longest downturn in decades, but Labor policies could make it even worse, UBS has warned.

“This time is different,” says UBS.

The housing market is set for its longest downturn in decades, but any policy change to limit negative gearing such as proposed by the federal opposition could make the situation even worse, according to investment bank UBS.

In the past, when house prices weakened, the Reserve Bank could cut interest rates to stimulate demand again, which looked unlikely to happen now, UBS said.

“But ‘this time is different’,” UBS economists George Tharenou, Carlos Cacho and Jim Xu warned in a note to clients.

“Both (regulator) APRA and the RBA are not flagging easing, showing little willingness to reflate housing. Furthermore, the RBA has limited ability to stimulate given they’re already near the ‘lower bound’.”

Housing prices in Australia’s east coast capitals have been falling more recently after soaring over the previous five years, as regulators have clamped down on credit to investors and riskier borrowers.

Past downturns have been due to higher interest rates crimping demand for housing but this time the falls are due to a reduction in the supply of loans even as demand is still steady or rising, UBS said.

UBS expects housing prices to fall 5 per cent or more and also tips a 20 per cent drop in home loans.

But curbs on negative gearing tax breaks, which have been proposed by Labor, could weaken the housing market further because they could affect demand, UBS said.

“If demand for housing actually did drop materially ahead — say due to a policy change limiting negative gearing and capital gains tax concessions — it could point to a more negative outlook than we expect,” UBS wrote.

“This could accelerate the weakness in loans currently, currently driven by a retracement of investors borrowing for established homes.

“If this also caused house price expectations to turn negative, the risk would then be a broadening of weakness in demand to spread to owner-occupiers which are currently resilient.”

UBS has previously warned on the issue of “liar loans”, estimating that Australian banks have lent $500 billion to borrowers who gave lenders information that was “not completely factual and accurate” to get a mortgage.

The investment bank has also argued one third of borrowers with interest-only home loans do not realise they are failing to pay off any of the mortgage’s principal.

Sydney housing prices fell 5.4 per cent over the past year while Melbourne values slipped 0.5 per cent, according to property researcher CoreLogic.