UBS bear slashes mortgage, house price outlook

They just keep getting more bearish at UBS:

New comprehensive credit reporting rules from mid-next year could reduce borrowing capacity by about $100,000 for many households, as credit card limits and other debts are taken into account, the bank said.

…When negative gearing arrangements were limited in 1985 and a capital-gains tax was introduced, the value of investor home loans dropped by 30 to 40 per cent — likely amplified by the Reserve Bank hiking interest rates at the same time, UBS said.

As the investor share of home loans has since tripled from about 13 per cent to 40 per cent now, the impact of any curbs on the broader housing market could be magnified, according to the research.

UBS previously forecast a drop of -20% in mortgage issuance and house prices falling 5%+. It’s now out to -30% for mortgages and -10%+ for prices.

That is the right base case. Then rate cuts delivering a brief respite before the realisation that there are none left and the return of more pain exacerbated by the next global shock for another 10%+ downside.

Comments

  1. House prices will fall more than 10% when the AFC (Australian Financial Crisis) hits. When credit gets really frozen up it will be much worse just like in the US.


  2. It’s now out to -30% for mortgages and -10%+ for prices.

    CoreLogic has national falls at 3.7% peak to trough so far, and falling at an annualised 6.4% based on quarterly falls, so 10% plus is just ruling a straight line on the page – barely a forecast.

  3. Lenny Hayes for PMMEMBER

    Anecdata time:

    – Brother located o/s is looking to buy a house in anticipation of a move back to Oz in 2-3 years with a sizable $300k deposit in cash and annual salary of $A 400k equivalent
    – Mortgage broker said the best he can get is a $600k loan which equates to a roughly $900k purchase price (none of the Big 4 will do anything competitive, this is 2nd tier lender)
    – Apparently this would have been $1.2 million about 12 months ago
    – They are now questioning whether relocating back to Australia is a good option given what you get for $900k (but not because of the size of the loan bizarrely)
    – They can effectively live anywhere in the world and Australia looks like a 3rd rate option

    • Good anecdata, but very niche. Clearly lenders are wary about his job security (due to change in geography or whatever).

      A local with $300k in cash and a secure $400k salary will obviously be able to borrow much much more than 600k.

      • Lenny Hayes for PMMEMBER

        To be fair his salary is based on a low tax jurisdiction equivalent but the banks will only measure it using Aussie tax rates apparently.

        His job profile or employer has nothing to do with it and I doubt any nuff nuff working in a lending department would have any idea what it all meant.

        Anyhoo it looks like a return to Oz is off the cards for him and his peers for the time being.

    • @Lenny if this is atypical of new lending practices the UBS statement “reduce borrowing capacity by about $100,000” is pure fantasy.

      As a scenario I’d suggest the impact on a family looking to upgrade would look like this…

      Old New Difference

      Household net disposable income $100,000 $100,000

      Borrowing Capacity 10x now 5x
      Borrowing amount $1,000,000 now $500,000

      Apartment Value $750,000 now $675,000 (10%)
      Existing Mortgage -$187,500 -$187,500
      Equity $562,500 now $487,500

      Purchasing Capacity $1,562,500 now $987,500 -$575,000
      -37%

      This combined with the principal / interest only reset, China bid, Consumer sentiment and other factors is going to have a significant impact on the market.

      Tick, tick, tick……

      • If banks wont even give you your current mortgage amount how on earth are you going to be able to upgrade? Owners will be trapped in their existing houses, thus removing a sizeable chunk of buyers from the market.

    • That’s some salary, surprised it’s capped at $600k but I guess that’s prudent. Westpac was willing to extend me $800k in 2015. Not sure now? I would have to check for giggles.

      • Lenny Hayes for PMMEMBER

        Robert – zero chance that happens and in his line of work he would by lucky to get half that back in Sydney (if indeed he could find a similar gig).

        Just thought the initial response to lending amounts was interesting. 5 years ago you could probably have borrowed 5 times that salary regardless where it was being earnt. Take it as you will.

      • Surprised anyone will lend to him at all while he’s still O/S in his current job – seems like huge risk. How do you predict what his income will be by the time he gets over here, or how long his job search is going to be?

      • Lenny Hayes for PMMEMBER

        Pretty much every Aussie I know who lives overseas owns 1-2 investment properties and hasn’t struggled to organise finance for them.

        Our current landlord is a young lass in her early 30’s working in New York in Finance who bought the place at auction for mid 800’s.

      • No doubt that’s true – I just can’t think for the life of me how the lender figures out how much the borrower will earn when the return to Australia. Different for an IP that’s funded indefinitely by the borrower’s O/S income and/ or the rental I guess, but for a place to be moved into after return to Oz, seems like the only way to figure the borrowing capacity would be a roulette wheel.

      • The difference is that the overseas owners still have a job and therefore the ability to repay the mortgage.

        Effectively the bank is giving a $600K loan to an unemployed guy with a big deposit. There is no guarantee that Lenny’s brother will be able to make anything like the $400k salary he is earning overseas – if he can even get a job in that field in this country.

    • Brother located o/s is looking to buy a house in anticipation of a move back to Oz in 2-3 years
      I suggest he come back for a visit and drive around to a few place he expects to frequent when he lives here. I suggest driving off-peak AND during peak.

    • If he’s moving back in 2-3 years, why don’t you suggest he waits 2-3 years before buying something better for the same money?

    • When the sister was in Dubai brokers sourced very low interest money in Singapore for expats to use to buy in Australia. Bro should look elsewhere.

      • Good advice – but Australia is still overpriced.

        Bro would be better off buying in 2-3 years. Prices are sliding and there won’t be any maintenance/rates/insurance expenses for that period.

    • Similar situation except with half that salary and they will lend up to 800k ( 4x LTI) making it a 1.1m purchace. With a 20%+ deposit you will get a 3.7% rate and offset. No other debt

  4. “UBS previously forecast a drop of -20% in mortgage issuance and house prices falling 5%+. It’s now out to -30% for mortgages and -10%+ for prices.”

    Riddle me this – if mortgages are down 30% and prices only 10%, where is the other 20%?

    Clearly not in additional deposits/savings – that would be ludicrous.

    Is it in reduced transaction volumes? My brain can’t immediately work out what sort of volume drop is required – anyone want to help?

    EDIT: my numbers say it depends on the avearage deposit:debt ratio. Assuming 20% typical deposits – volumes need to drop about 16%. If we have 10% deposits, volumes need to drop about 19%.

    Hmmmm. Where are we at now with volumes?

      • Okies, so we are basically there for Mel/Syd.

        Now the pent up supply and demand begins to build. Who will blink, who will break first?!

        Every other time it has been the pent up supply that could be contained no longer and prices broke upwards.

      • Nah mate. RBA are bastards, but they’re not d!ckheads.

        They know that they have to get out in front of it to save it. QE will come first, BEFORE it is obviously too late for the housing market.

      • I can’t agree, unless its a case of rising unemployment or some external shock that for some reason manages to leave house prices unscathed.

        Then when you look at the impact of QE on interest rates and/or house prices there’s not a strong correlation. In the US periods of QE usually corresponded with rising bond yields and mortgage rates as equity markets got frothy. Japan and EU have managed to lock rates down much better, but the impact on house prices is quite mixed, dependent on the health of each individual nation’s economy.

      • HnH – didn’t you report that they are already pumping the CLF hard? Or it might’ve been Leith. Or were they just loosening the pricing/asset eligibility ahead of the pumping? I forget.

        Remember that QE in all other major jurisdictions originally took the form of a flood of emergency liquidity, right?

      • Peachy – the real thing I don’t understand about QE is – why print money just to bring “liquidity” to the mortgage market? You could just print money; give it to the Government and have a one-off “debt repay” tax deduction/payout? Improves asset quality of the debt (capacity to pay) providing more liquidity and reduces personal debt at the same time. This is where my understanding of economics gets limited – I just never understood why they buy the junk debt securities (throwing money away) vs just giving it as debt relief to the borrower instead which is also throwing money away but at least with some benefit. At least the latter reduces the personal debt in the economy.

      • “Nah mate. RBA are bastards, but they’re not d!ckheads”

        Nah mate, you got that backwards, the RBA are d!ckheads not b*stards.

        I really don’t think they are very bright.

  5. Whichever way you cut it, if you can’t borrow as much, houses ain’t worth as much….and…..the negative loop sets in because the next valuation will be even lower than the previous one.

    • Don’t worry – prices will stop falling when a house can be bought for what a visa holder working in a 7/11 can save in a year and no extra borrowed money.

  6. I’ve just tuned in to Million Dollar Listing New York – last 5 seasons have been about record breaking prices and sellouts of new condo buildings. This season its apparently a “buyers market”, days on market to make a sale has blown out from 30 to 400 (for >$4m apartments), and the banks are knocking on the doors of developers. Vendors are being forced into substantial discounts, and the term “firesale” is being bandied around. I reckon this season is going to be the best yet LOL

  7. reusachtigeMEMBER

    5-10% … LOLOLOLOL… cyclical negative sideways movement at best. Hardly bear, just realist. They know the next boom will then hit in!

  8. Interesting. Westpac is trying to dump risky borrowers off their books:

    Westpac Group, the nation’s second largest lender, is giving risky property investors less than one month to find another lender amid growing concerns about the impact of rising rates, falling values and oversupply.

    The bank is sending single page letter to investors warning it can “no longer support our commercial relationship with you”, adding it will work with the borrower to help them find a new lender.

    Perhaps the dam is starting to break. Firesales when?

      • Haha 18 months. I think its boiling under the surface and locked in. In my humble opinion i believe easter to july next year will be the time the slow melt starts becoming a flood. My reason is based on my own search for an abode in Brisbane. In the last few months have seen sellers test the markets with high prices and in the last two weeks seen houses listed 200k less than the aspirational prices. So down to 500-600k from mid 700k. I see a mix of aspirational and desperate listings. The wife is even saying cant buy now.

    • Are they calling in the loans?

      (Presumably, if so, these are loans in breach of some t&cs, such as LVR requirements, etc)

      • The Penske FileMEMBER

        It sounds like commercial only as you can’t just call up a normal 30 year home loan… technically you might be able to but the NCCP would in my mind offer more than 30 days grace. Basically it doesn’t sound like a “ma and pa” loan and NAB do this type of thing often. I don’t think it’ll be an LVR issue as I find it hard to believe any bank would mark to market their LVR exposure…. imagine WA.

      • Penske – Everything you say makes sense and aligns with my thinking. This must be a narrow sliver of particular borrowers.

        The precedent value of marking LVR to market in a garden-variety mortgage would not be something any sane bank would voluntarily embark on. That way lays ruin.

  9. They have to get rid of them before the courts find them unenforceable due to breach of lending regulations, and the precedent for borrowers to simply walk away is set.

    • Yes I think that is right. Hence, they will help them find a new lender. Nothing personal. we’d just prefer if you banked elsewhere.

  10. “Westpac said it is attempting to locate the letter” lulwot?!

    This will be disclaimed, denied, distanced, abandoned, abdicated from and avoided. Now that it has been aired in the national press and hasn’t flown under the radar, that is.

  11. This article implies the banks have not been including borrowers other debt obligations, such as credit card balances, when assessing credit worthiness. This is awful. At junior banker training school, it was beaten into us that we always had to consider other borrowings, as without doing so, you cannot understand whether the borrower could service their total debt burden. That this is considered a “new” requirement is laughable. If the banks are this bad at doing their job, they deserve to be intervened and management replaced

    • True but they will argue people lied on their applications in relation to other debt.

      Now Open Banking has started they can see the truth and will be sh!tting themselves as to how much they lent and to whom.