One of the few reassurances we have that the housing market downturn won’t turn into a painful slump comes from the Reserve Bank of Australia (RBA) as our central bankers have downplayed the risk of a credit squeeze. But UBS believes the RBA was using inaccurate data to reach the conclusion that’s outlined in its semi-annual Financial Stability Review and the risks are likely to be larger than what many might believe. While the RBA noted that housing market conditions are easing as the banks applied tighter lending conditions, it also pointed out that most borrowers do not borrow the…
To keep reading, enter your email address or login below.
One of the few reassurances we have that the housing market downturn won’t turn into a painful slump comes from the Reserve Bank of Australia (RBA) as our central bankers have downplayed the risk of a credit squeeze.
But UBS believes the RBA was using inaccurate data to reach the conclusion that’s outlined in its semi-annual Financial Stability Review and the risks are likely to be larger than what many might believe.
While the RBA noted that housing market conditions are easing as the banks applied tighter lending conditions, it also pointed out that most borrowers do not borrow the maximum loan possible.
This means the vast majority of prospective borrowers have not been impacted by tighter lending standards, according to the RBA.
That would be great news for those who own shares in companies linked to the residential market like property developers Mirvac Group (ASX: MGR), home furnishing and appliances retailer Harvey Norman Holdings Limited (ASX: HVN), building materials supplier CSR Limited (ASX: CSR) and our largest home loan providers Commonwealth Bank of Australia (ASX: CBA) and Westpac Banking Corp (ASX: WBC) – just to name a few.
Their share prices have been under pressure on worries of a hard landing in the housing market that is driven in large part by a limited availability of credit to potential home buyers.
However, UBS points out that the RBA was using the 2014 Household, Income and Labour Dynamics in Australia (HILDA) survey that only looked at owner-occupiers.
“Since then, the aggregate household debt-income ratio lifted 20 [percentage points] and house prices spiked 20%,” said the broker.
“Furthermore, while the RBA correctly notes the ‘NIS incorporates many buffers’ since 2015 which already reduced maximum loan size, the Royal Commission found ~75% of home loans until very recently assumed living expenses based on the unrealistically low HEM benchmark.”
NIS is net income surplus, a measure of the amount of cash borrowers had left after paying debts and living expenses. HEM is household expenditure measure which estimates what the typical household spends on living expenses.
What’s more, there are three other potential negative drags that are yet to play out. This is the new debt-to-income limits that the banks are likely to adopt as an additional criterion in approving loans and the potential changes to negative gearing and capital gains taxes if federal Labor comes to power next year.
“Hence, we reiterate our view that credit tightening will materially reduce borrowing capacity, and we still forecast home loans to drop by a cumulative 20%, but with the risk of -30%,” warned UBS.
I am avoiding stocks linked to the local housing market but this doesn’t mean there aren’t opportunities on the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index.
In fact, the experts at the Motley Fool have uncovered three blue-chip gems that are well placed to outperform the market in FY19.
Click on the free link below to find out what these stocks are.
For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..
But knowing which blue chips to buy, and when, can be fraught with danger.
The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."
Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.
The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.
Click here to claim your free report.
Motley Fool contributor Brendon Lau owns shares of Westpac Banking. 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 Scott Phillips.