Housing Risks Re-Emerge Wilting house prices have prompted 50% of Australian fixed-income investors to nominate a domestic housing market downturn as the top risk to Australian credit markets over the next 12 months. While regulations and tighter lending standards have played their part, external threats posed by trade wars also loom and are reflected in other related risks, namely a China hard landing, adverse emergingmarket developments and US presidential impact.
Economic Stability Despite Pressure: Investors’ concerns around a housing downturn are mirrored in their price expectations, with 82% believing prices will decline by between 2% and 10% over the next 12 months. However, broader economic deterioration is not envisaged, with 97% of investors expecting unemployment to remain below 6.5% through to mid 2020. Interest rates are also expected to remain low, with 73% of investors seeing no change to Australia’s official cash rate over the next 12 months.
Tight Credit Conditions Prevail: Property market exposure poses the most serious threat to bank asset quality over the next 12 months, according to Australian xed-income investors. However, investors have also become more concerned about threats arising from regulatory and legislative changes, which have already led to tighter lending standards. More than 60% of investors believe standards will tighten further over the next 12 months for high-yield corporates, SMEs and the retail sector.
Shareholder Activities Preferred Use of Cash: Shareholder-oriented activities remain the preferred use of cash for Australian corporates, according to 78% of survey respondents. This has been a consistent nding across all our surveys, but 4Q18 survey investors indicate that corporates may have an increased appetite for M&A as a use of cash.
End to Spread Compression: Most investors expect spreads to widen in four asset classes over the next 12 months: financials, non-financial corporates, structured finance (RMBS and ABS) and unrated. Likewise, when asked what investors are willing to pay across a range of asset classes, responses indicate the sustained period of compression appears to be coming to an end in seven of ten classes surveyed, including major-bank issuance of senior unsecured, Tier 2 and ‘AAA’ RMBS as well as ‘A’ and ‘BBB’ rated corporates and unrated issuers.
It’s not clear to me why prices will stop falling at -10% unless the RBA cuts.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
