UBS runs the property scenarios

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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.

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About the author
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.