UBS runs the property scenarios

Via the excellent Jonathon Mott at UBS:

Scenario 1 – ‘Bounce-back’: A recovery in housing lending flow (+20%) back to record levels would add 2.2% to housing credit growth (1.5% to EPSg). But this would likely give rise to a sharp bounce in house prices and household debt. Stimulatory policies would likely be reversed. Scenario 2 – ‘Modest Recovery’: New housing lending bounces ~10%, adding 1.1% to housing credit growth and 0.7% to EPSg. However, with rates remaining low, NIM pressure from deposit spreads and replicating portfolios (hedges) offsets credit growth. Delinquencies continue to rise given Interest Only (IO) maturities. Scenario 3 – ‘ Stagnation’: Global environment remains uncertain and an increase in expense assumptions (HEM) offsets APRA’s removal of the serviceability floor.

My pick is between scenarios 2 and 3. Moreover, I think UBS has the house price growth impacts a little wrong, at least for Sydney. Owing to the Sydney mortgage belt being deeply underwater for the last few year’s of buyers, I think even a modest credit recovery is unlikely to bounce prices very far. I favour a rerun of the post-2003 stagnation for the harbour city.

David Llewellyn-Smith
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