UBS out-bears them all with housing crash scenario

UBS’s Jonathon Mott has led the sell side on the housing bust and he’s refusing to be headed now. His new note proposes a worst case scenario in which Aussie house prices crash 30%, the RBA cuts rate to zero and launches quantitative easing, and banks are crushed by cascading bad debts, cut dividends and class actions.

Mercifully, this is not his only scenario, indeed he provides five:

…the three more bearish scenarios foresee a housing correction where prices fall more than 10 per cent after the banking sector is forced to strictly comply with responsible lending laws at the same time the sector is forced to shell out more revenue in customer remediation for previous bad conduct.

…Maurice Blackburn financial services Principal Josh Mennen said his law firm had been inundated with borrowers looking to make a claim after being sold into an interest-only loan unaware, and were now facing steeper mortgage repayments at the end of the interest-only period.

He also said borrowers were seeking to make claims against banks that had low-balled their expense information when applying for loans, and against brokers who had supplied dodgy information to lenders.

Mott says we are currently on track for his third scenario buts adds:

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.

I agree that we are on track to see the first leg of house price falls in Sydney and Melbourne pass into MB’s forecast -10-15% range.

We then see a high risk of a second leg lower as the global cycle delivers an exogenous shock to an already very weak market taking prices another -10-15% lower.

I guess that gives you one of Mr Mott’s worst cases.