A new analysis by UBS concludes that housing prices in Australia could fall as much as 30% in a deep recession scenario. UBS analyst Jonathan Mott assembled five different scenarios to predict the direction that Australia’s housing market could go. The worst case includes the first recession in 27 years, a 30% collapse in house prices and widespread litigation against the banks for mortgage mis-selling. The bear case would also include the central bank cutting rates to zero before embarking on its own version of quantitative easing, the suspension of dividends and equity raisings from the big banks.
Mott thinks that current conditions are already reflecting the very real possibility of a housing correction and also warns that risk of a credit crunch "is real and rising."
Mott stated: "The rapidly deteriorating housing market is a signal of even tougher times ahead. The housing credit squeeze experienced over the last six months is expanding. The outlook for the banks has not been as challenged since at least 2008."
UBS dire forecast comes at a time when tighter lending standards have restricted the availability to borrow in Australia, causing the country to enter its second year of a housing slide. Major cities like Sydney and Melbourne are leading the declines, down 7.4% and 4.7% in October from the previous year, respectively. These were the two hottest markets when prices were on their way up in years prior. Meanwhile, the Australia House Price Index has posted its first sequential decline only for the first time since 2011.
Meanwhile, the Reserve Bank of Australia has kept its rate cash rate unchanged and at a relatively low 1.5% since the middle of 2016. The crunch is coming mainly from regulators cracking down on riskier loans, such as interest-only mortgages, that are more popular with speculators than traditional buyers. On top of that, Australian Regulators have enforced more stringent verification on expenses that is tightening the amount of money people are able to borrow as Australians already have some of the highest household debt in the world, something we pointed this in August.
As a reminder, the Australian household debt to income ratio has ballooned to shocking levels over the past three decades as Sydney is ranked as one of the most overvalued cities in the world. According to the Daily Mail Australia, credit card bills, home mortgages, and personal loans now account for 189 percent of an average Australian household income, compared with just 60 percent in 1988:
An additional reason Australia's housing prices boomed was the influx of overseas capital. We recently discussed the urgency with which the Chinese middle class was trying to get capital out of the country. And one of the main ways to do this involved investing in homes in places like Australia (and Canada). Those looking to buy real estate outside of the country have negatively impacted many local economies, sometimes causing housing markets to bubble.
In response, Australia has tightened its foreign investment rules. In 2016, the land Down Under even made it illegal for the country's four major banks to lend to foreign property buyers without domestic incomes. New Zealand went so far as to simply prohibit foreigners from buying property altogether because the demand was driving property prices out of the reach of locals. Canada did something similar, canceling its Canadian Federal Immigrant Investor program because of the huge backlog and bubbly real estate markets in places like Vancouver and Toronto.