RBA hikes could trigger crash: UBS

While the housing market is still correcting, one economist has said the wrong RBA decision could have catastrophic consequences

RBA hikes could trigger crash: UBS



While signs in the housing market still point to a correction, one leading economist has predicted a true crash if the Reserve Bank of Australia (RBA) makes the wrong decision when hiking the cash rate.

George Tharenou, economist at UBS, said that both dwelling commencements and approvals have slowed down even before macro-prudential tightening brought in higher interest rates.

Commencements have thus corrected back to normal levels, he said in an investor note released on Monday (24 July).

“With the historical trigger for a housing downturn being RBA hikes, we still see rates on hold in the coming year, amid macro-prudential tightening on credit growth and interest only loans. Hence we still see a ‘correction, but not a collapse’, but if the RBA hikes too early or too much (as flagged by its hawkish minutes), it risks triggering a ‘crash’.”

Despite positive signs such as increasing jobs figures, a surging population and a more stable global economy, Tharenou flagged risks such as decreasing foreign investor demand, rising mortgage rates and falling home buying sentiment.

“So overall, we expect approximately flat GDP-basis dwelling investment in 2017, before dropping by 6% year on year in 2018, dragging around half a percentage point through the year from GDP – which is a weaker view than the RBA that still sees a housing contribution ‘over the next year or so’ to underpin its expected lift in GDP to an above trend 3¼ per cent year on year.”

Despite weaker activity, house prices grew by around 10% year on year in June. This level of growth is unsustainable, he added, being four or five times faster than income growth.

“Looking ahead, we still see price growth slowing to around 7% year on year in 2017 and 0-3% in 2018, amid record supply & poor affordability. Indeed, even without any RBA hikes, the new home buyer mortgage payment share of income already spiked to around a decade high.”

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