UBS: Markets to “crash” Aussie housing and drive recession
Australian chief economist, George Tharenou, has warned that the futures market’s forecast 3.5% official cash rate (OCR) would “crash housing” and could see the economy plunge into recession:
“We still think market pricing of about 3.5 per cent – if delivered – would likely crash housing, and see the economy nearing a recession”…
“We’ve seen house prices start to fall immediately on a national basis… This time around the housing market began to weaken quite quickly.”
“Interest payments across the economy next year for the household sector will close to double from now. We have never seen such a sharp increase in repayments”.
“That really crushes household cashflow next year when you have cost-of-living issues.”
MB holds a similar view. If the market’s OCR pricing came to fruition, it would see the average discount variable rate roughly double from its pre-tightening level to 6.8% by May 2023:
Mortgage rates would double.
This would represent the sharpest lift in mortgage rates and repayments in Australia’s history. The combination of significantly higher mortgage repayments and falling house prices would also crush household consumption – the economy’s biggest growth driver – and risks plunging the nation into recession.
Like MB, George Tharenou believes the Reserve Bank will stop well short of hiking rates that far. UBS forecasts a peak OCR of 2.6% at year’s end, followed by cuts in the second half of 2023 as the economy teeters on recession:
“There’s a risk of overtightening because the economic sensitivity is much greater due to the variable rate mortgage rate structure”…
“After next month I think they slow down and get stopped out by this housing downturn, which really won’t impact consumption until next year”…
“The house price outlook is at least 10 per cent down over the next year, but to stop a larger fall will require the RBA to shift their policy direction and start cutting next year.”
Mortgage holders better hope that the market is wrong, and that the RBA stops well short in its monetary tightening.
Otherwise they face a vicious rise in mortgage repayments, sharp house price falls, alongside the prospect of job losses. It would be the recession Australia didn’t need to have.
