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UBS calls the peak of housing boom, predicts correction not collapse


Written by Stefan Kostarelis

Investment bank UBS’s Australia economics research team has announced that it believes the Australian housing market has peaked.

UBS published a 69-chart analysis of the situation and sent an accompanying note in which it “rang the bell” on the housing market.

“After housing activity rose consecutively for over four years, its longest ever boom, we are now calling the top and think that housing activity has already peaked,” UBS economists Scott Haslem, George Tharenou and Jim Xu wrote in the note to clients.

However, rather than predicting collapse, Haslem, Tharenou and Xu added that they are expecting the market to correct.

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“Housing activity will correct sharply and prices to cool, but still won’t ‘crash’,” the note said. “The lack of RBA rate hikes reduces the likelihood this evolves into a crash.”

The announcement comes as banks respond to regulatory pressure with measures to curb risky lending. Westpac hiked interest rates on fixed-rate, interest-only home loans on Monday, following  Commonwealth Bank, which raised fixed rates on Friday.

At present, housing affordability in Australia is at one of the lowest points every recorded, while household debt is at a record high. According to Finder, Australia’s household debt to GDP is currently hovering around 125% making it among the highest in the world.

Although household debts have been kept affordable by low interest rates, UBS notes that new homebuyers are now spending an average of 28 percent of their incomes on mortgage repayments, the highest amount since 2008, and well above the long-term average of 23 percent.

The bank also said that the supply of housing coming into the market is being driven by new apartments, which are being built at twice the rate as they were in 2010.

We’ve already discussed the difficulty of predicting bubbles and UBS’s announcement has received a mixed response from analysts.

Looking at data from Core Logic, financial economist Christopher Joye also concluded that the housing market might be grinding to a standstill.

“While a very early partial read, auction clearance rates were softer last weekend, which corresponds with the pronounced deceleration in price momentum. I expect this to continue over the rest of the year,” he said.

On the other hand, Louis Christopher of SQM Research said that it is “too early to call” the end of Sydney and Melbourne’s housing boom, adding “a weekend of lower-than-80-per-cent clearance rates was hardly commensurate with some new downturn in the housing market.”

Ray White Real Estate chairman Brian White likewise questioned the negative sentiment, saying:

“We are still living in an era of relatively low interest rates so to say there will be no more price growth I don’t understand…We had plenty of auctions on the weekend and there were many that sold above reserve. I also think there are massive parts of Australia who have not seen the price growth so I would trust that those setting housing policies realise the disparity in markets.”

Over Easter, just 493 houses went up for auction with a clearance rate of just 73.9 percent. Last weekend, the clearance rate slid to 72.1 percent with 1,732 properties going under the hammer according to Core Logic.

Melbourne saw the most significant increase in activity and also returned the highest clearance rate of all the capital cities. Both the clearance rate and volumes were higher than the corresponding weekend for last year, when the rate was just 69.7 percent on 1,565 auctions.

The analysts at UBS believe that the housing market will see around 7 percent annual growth in 2017 as a whole, down from current levels of around 13 percent. The outlook for 2018 isn’t so sunny, with a predicted growth of between zero and three percent.

The note also cautioned that dwelling investment could continue to drop in 2019, putting the Reserve Bank in a potentially tough spot.

“Given the cash rate is already at a record low, and the prospect that the RBA attempts to start normalising rates by end-18, it seems unlikely commencements would rebound, and hence dwelling investment could keep falling in 2019.”

“This makes for a difficult policy position for the RBA. If it hikes too early/too much, it could turn a ‘normal’ housing correction into a slump.”

If UBS is right, the bubble is currently as big as it’s going to get. We all know what happens to huge bubbles, so let’s hope they are also correct about the relatively soft landing.