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.
Where to invest $1,000 right now
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*
Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.
*Returns as of June 30th
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.
- The next battle facing these ASX stocks will come from within – August 13, 2020 12:52pm
- Qantas share price is facing this new challenge in FY21 – August 13, 2020 9:53am
- These ASX stocks could be the next reporting season heroes – August 12, 2020 2:53pm