The latest Australian Banking Sector Update from UBS said that its analysts “believe the housing market faces a number of material challenges as the housing bubble begins to deflate”.
Chief among these “challenges”, the researchers claimed, are the impacts of macro-prudential measures imposed by the Australian Prudential Regulation Authority (APRA), specifically the limits on interest-only lending.
UBS cited that a fall in interest-only (IO) loans issued by lenders, driven by their rate increases to “pass on the cost of the bank levy and reach these targets”, has forced a number of “marginal borrowers” out of the market.
“Following moves by the banks to increase interest-only mortgage rates to pass on the cost of the bank levy and reach these targets, the level of interest-only borrowing has fallen well below APRA’s threshold to the mid-to-high teens,” UBS noted.
“We believe a number of marginal borrowers have exited the market, given repayments under the principal and interest schedule are approximately 30–60 per cent higher,” the report said.
The report also claimed that a ramping up of pressure from regulators on banks to improve underwriting standards “is likely to restrict the flow of new credit and demand in the housing market”.
Further, UBS stated that it expects interest in the Australian housing market from foreign investors to cool, claiming that sales from foreign buyers will fall below the reported figure of 17 per cent nationwide.
According to the report, sentiment for investment in the Australian housing market is also “waning”, with the “fear of missing out euphoria fading quickly”. It also stated that housing affordability pressures have contributed to reduced demand, particularly in Sydney.
Additionally, UBS reported that a fear of changes to negative gearing and taxation are also likely to diminish enthusiasm from property investors.
Amid concerns from Australian regulators over household debt, UBS noted that household debt in proportion to disposable income has risen to a record high of 20 per cent, which it suggested could deter prospective home buyers from applying for a mortgage.