Hasty rate hikes could trigger housing crash, UBS warns
A recent correction in ‘s housing market could turn into a full-blown crash if the Reserve Bank hikes rates too soon or too fast, a global investment bank has warned.
The end of the nation’s world record housing boom and the drawing down of household savings has caught the RBA in an interest rate trap, says George Tharenou, chief economist at UBS.
Dubbing it the “household wealth effect”, he has outlined a scenario where rising asset prices, falling savings and the fact that consumption has grown faster than wages leave ns particularly vulnerable to interest rate hikes.
“People underestimate this sensitivity to interest rates,” Mr Tharenou said at a market briefing in Sydney on Friday. “If the RBA hikes too much or too early, it runs the risk of turning a quarterly correction in the housing market into a crash.”
“The run-up [in property prices] in recent times has people feeling better about their wealth, so they don’t save.”
The RBA on Friday signalled it will likely keep the current historically low official interest rate unchanged as it waits for a slow return to healthy levels of inflation, wages and economic growth.
Mr Tharenou sounded his warning after calling the end of ‘s 55-year long housing boom earlier this month, saying the golden years were “officially” over after home prices fell in Sydney for the second month in a row.
A voracious construction cycle, urged on by record low interest rates and a flood of foreign investment into property, has left people complacent that their household wealth is sufficient – even if it may be tied up in their homes, leaving them potentially cash-poor.
Should property prices soften, as Mr Tharenou predicts, household consumption – the money people spend in the broader economy – could very quickly dry up as people focus again on saving, impacting the nation’s economic growth.
“The RBA has acknowledged that risk, that there is uncertainty around the consumption outlook,” said Mr Tharenou.
“They thought [consumption] would rise to above average but it hasn’t done that so far and I think that it’s unlikely to do so, there’s just not enough income growth.”
Meanwhile, the rate of household debt continues to grow faster than incomes.
“People are taking on debt to buy houses but without their wages growing,” said Mr Tharenou. “I think low wages are a much more structural problem than people realise.”
“There is a lot more capacity in the labour market than many think, there’s lots of underemployment and despite recent tightening, that hasn’t resulted in wage growth.”
And with the housing boom over, the reliance on property as the bulk of household wealth looks to be under threat.
UBS expects house price growth to moderate from double-digits to around 7 per cent in 2017, and not reach more than 3 per cent in 2018.
Recent data show evidence of a slowdown in house price is fast-emerging. House prices in Sydney fell 0.1 per cent over September, the first fall since late 2015, according to Corelogic figures.
And over the third quarter, Sydney’s median house price fell 1.9 per cent to $1,167,516, according to Domain.
Traditionally, n monetary policy has followed that of the United States, which has begun its own rounds of interest rate rises.
But despite markets pricing in potential hikes in the near future, UBS doesn’t see the RBA becoming swept up in the global tightening cycle.
“We won’t see the RBA blindly follow the US, especially since people will really feel a hike in interest rates,” said Mr Tharenou.