Australia House Prices Could Drop 30% in UBS Recession Scenario

(Bloomberg) -- Australian house prices could plunge 30 percent under a deep recession scenario analysis conducted by UBS Group AG.

In the worst of five cases assembled by UBS analyst Jonathan Mott, Australia’s 27-year economic expansion ends, unemployment climbs and the central bank cuts interest rates to zero, according to a Nov. 12 research report. He currently forecasts conditions as reflecting the third scenario -- a housing correction -- but warns the risk of a credit crunch “is real and rising.”

“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,” said Mott, who is bearish on the nation’s lenders. “The outlook for the banks has not been as challenged since at least 2008.”

Australia’s housing slide has entered its second year as tighter lending restrictions limit the availability of credit and weigh on the market. Sydney and Melbourne, the hottest markets when prices were surging, are now leading the declines, falling 7.4 percent in October from a year earlier and 4.7 percent, respectively.

While the Reserve Bank of Australia has kept its cash rate unchanged at a record-low 1.5 percent since August 2016, regulators have cracked down on riskier loans such as interest-only mortgages that are popular with property investors and enforced stricter expense verification that’s reducing the amount people can borrow. On top of that, Australians carry some of the highest household debt in the developed world.

©2018 Bloomberg L.P.