However, it now thinks the housing downturn could end up being more severe than what it initially thought, meaning this downturn could end up being the longest in several generations. “We’ve long expected the value of home loans to drop by a cumulative 20 per cent, which is the main driver of home prices, which consequently will likely fall 5 per cent plus,” says George Tharenou, Economist at UBS. Loading “We expect further credit tightening, and the RBA’s lack of willingness to cut rates this time, to see the longest house price downturn in decades.” Given those headwinds, Tharenou says there’s a risk that home loans could fall by as much as 30 per cent, potentially seeing credit growth fall to zero. Under such a scenario, he says that could also see home prices decline more than his current forecasts of 5 to 10 per cent.

While much of the recent focus has been on the introduction of limits on high loan-to-income borrowers, Tharenou says it is curbs on lending to high debt-to-income borrowers — those already carrying substantial amounts of debt — that could exacerbate the downturn in the housing market, particularly in markets with high housing valuations such as Sydney and Melbourne. “We believe APRA may want [borrowers with a debt-to-income of greater than six times] down to around a 10 per cent market share, far below our current estimate of around 33 per cent,” he says. “[This] could sharply cut borrowing capacity for anyone with existing debt.” Tharenou also says this could mean the end of the “multiple property ownership model” whereby borrowers used capital gains on existing properties to secure finance to buy additional investment properties. UBS says curbs on lending to high debt-to-income borrowers could exacerbate the downturn in the housing market, particularly in markets such as Sydney and Melbourne. Credit:Peter Rae

“The much bigger negative impact of DTI limits will be on the ‘model’ of investors buying multiple properties,” he says. “Comprehensive credit reporting (CCR) and responsible lending will require lenders to verify all debt. Loading “This will impact borrowers who previously diversified investment property borrowings across multiple lenders and didn’t self-declare back to the original lender, but which will now be visible under CCR.” He says this means households, even those with above average incomes, are likely to find it “materially more difficult over the next year or so to purchase an investment if there is an existing mortgage”.

Along with a potential change in government at the next federal election, raising the prospect the Labor Party could limit negative gearing to new dwellings and halve the capital gains tax concession to 25 per cent on property sales, it explains why Tharenou sees downside risks to his house price forecasts. “The introduction of DTI limits and removal of negative gearing would likely be a further drag on investor loans for established housing,” he says. The 'multiple property ownership model' is also under pressure, says UBS. Credit:Jessica Shapiro “While investors wanting to enjoy negative gearing could shift to new housing, lending for established is now around 10 times larger than new. Hence, we doubt a rise in loans for new dwelling purchases could offset the fall in established.” And while he admits the outlook for the housing market does have some positives, pointing out that economic growth has strengthened, unemployment has fallen and population growth remains strong, Tharenou says there’s also a risk that persistent price falls could dissuade borrowers less impacted by lending restrictions to hold off property purchases on the basis there’s further downside to come.

“[If] this weakens previously resilient sentiment and demand, seeing larger home prices falls of more than 10 per cent, it could see the reversal of the big boost to consumption seen in recent years from the household wealth effect, hence raising the risk of an economic downturn and a credit crunch,” he says. It’s a bearish outlook compared to that offered by more optimistic forecasters. However, Tharenou is not alone in thinking this downswing in prices could end up being the longest in modern Australian history. Loading Last month, Paul Dales, Australia and New Zealand Chief Economist at Capital Economics, said prices could fall for years rather than quarters or months. “With the full effect of the tightening in credit criteria and recent hikes in mortgage rates yet to be felt, we suspect this downturn will end up being both the longest and deepest with prices falling by 12 per cent over four years,” he said.