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Why UBS thinks residential property prices could fall in Australia

ASX real estate investment trust or REIT represented by high rise city buildings photographed from below
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It sounds almost silly to be ringing a warning bell for the property market when the weekend sales data showed the housing boom still very much alive. But UBS believes investors are underappreciating the impact of visa changes in Australia, which is likely to see demand for homes fall over the near to medium term.

The broker said local housing demand could fall by up to 10% due to the changes to the 457 visa scheme used by foreign workers with specific skills. Demand could fall a further 30% if student visas fell by a third due to stricter conditions on migration that are being imposed by the federal government.

UBS is forecasting a much milder drop for its base case scenario, but make no mistake, the broker is expecting weaker demand going forward and there are a few reasons why local investors should pay attention to this emerging threat, which could have material implications for a number of ASX stocks.

Firstly, this risk factor is threatening a part of the property market that was seen to be better insulated from a property slowdown. Skilled Indian workers are the biggest users of the 457 visas and this group have used the scheme as a pathway to migration in Australia.

This demographic is overrepresented in Melbourne’s and Sydney’s housing market and they tend to buy house and land packages and not city apartments. A tapering in demand from the now replaced scheme will impact on Stockland Corporation Ltd (ASX: SGP) more than the likes of Mirvac Group (ASX: MGR) as the former is one of the country’s largest house and land developers, while the latter is more focused on apartments.

However, the apartment market is long seen to be the property market’s Achilles Heel due to oversupply. The scrapping of 457 visas could well put pressure on another part of the property market at a time when the apartment sector is undergoing challenging times.

What’s perhaps a bigger risk factor is student visas, which are dominated by the Chinese who use education as a way to get permanent residency in Australia. This demographic probably favours apartments over suburban house and land developments.

These potential headwinds are developing against a backdrop of tighter loan conditions and rising mortgage rates. This is why I had flagged residential-exposed stocks as the riskiest blue-chip sector to watch this reporting season.

Companies that supply building materials to the residential housing market could also be facing more challenging times ahead. I don’t know about you, but I will be closely watching the outlook statements from the likes of CSR Limited (ASX: CSR) and Adelaide Brighton Ltd. (ASX: ABC) when they release their results later this month.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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