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Money Hasty interest rate hikes could trigger a property crash, UBS warns

06:21  11 november  2017
06:21  11 november  2017 Source:   smh.com.au

6 things Australian traders will be talking about this morning

  6 things Australian traders will be talking about this morning Good morning and happy Friday. To the scoreboard. Dow. 23,516.26 +81.25 (+0.35%) S&P 500. 2,579.85 +0.49 (+0.02%) AUD/USD. 0.7718 +0.0041 (+0.53%) ASX200 SPI futures (December contracts). 5,939 (+19)Good morning and happy Friday.

As property prices come off, but wages fail to grow, people are much more sensitive to interest rate hikes , says UBS . A recent correction in Australia's housing market could turn into a full-blown crash if the Reserve Bank hikes rates too soon or too fast, a global investment bank has warned .

UBS expects house price growth to moderate from double-digits to around 7 per cent in 2017, and not reach more than 3 per cent in 2018. But despite markets pricing in potential hikes in the near future, UBS doesn't see the RBA becoming swept up in the global tightening cycle.

With the housing boom over, the reliance on property as the bulk of people's household wealth looks to be under threat.© Supplied With the housing boom over, the reliance on property as the bulk of people's household wealth looks to be under threat.

A recent correction in Australia's housing market could turn into a full-blown crash if the Reserve Bank hikes rates too soon or too fast, a global investment bank has warned.

The end of the nation's world record housing boom and the drawing down of household savings has caught the RBA in an interest rate trap, says George Tharenou, chief economist at UBS.

Dubbing it the "household wealth effect", he has outlined a scenario where rising asset prices, falling savings and the fact that consumption has grown faster than wages leave Australians particularly vulnerable to interest rate hikes.

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  Is it time to fix your power costs? Few moments can induce greater sweaty-palmed terror in householders then approaching the letter box and finding inside a bill from the power company. Depending on which state you live in prices rose up to 20 percent on the first of July. And this at a time when wages are increasing at less than two percent on average.No wonder our greatest worry as a nation is power prices.But there is a little-used option to keep your power prices locked in. Fixed-rate energy plans mean you pay the one rate for power over the life of the contract.

As property prices come off, but wages fail to grow, people are much more sensitive to interest rate hikes , says UBS .The end of the nation's world record housing boom and the drawing down of household savings has caught the RBA in an interest rate trap, says George Tharenou, chief

BIS warned that rising interest rates would make the current high levels of debt unaffordable. "In contemplating when and how quickly to raise rates BIS highlighted the US economy as the other major risk. "An issue is whether the US can continue to be the main source of global growth, given the

"People underestimate this sensitivity to interest rates," Mr Tharenou said at a market briefing in Sydney on Friday. "If the RBA hikes too much or too early, it runs the risk of turning a quarterly correction in the housing market into a crash."

"The run-up [in property prices] in recent times has people feeling better about their wealth, so they don't save."

The RBA on Friday signalled it will likely keep the current historically low official interest rate unchanged as it waits for a slow return to healthy levels of inflation, wages and economic growth.

Mr Tharenou sounded his warning after calling the end of Australia's 55-year long housing boom earlier this month, saying the golden years were "officially" over after home prices fell in Sydney for the second month in a row.

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According to projections released in December, officials expect three rate hikes in 2018 – so long as market conditions remain broadly as they are – but some economists believe the central bank could add another increase at its final meeting of the year.

“It helps pacify taxpayer risk that CMHC could collapse should any market dynamics shift at all. It really doesn’t have an immediate or direct impact on any bank What it might mean for the more entry level, more affordable housing price, instead of 10 offers on a piece of property we only get eight offers and

A voracious construction cycle, urged on by record low interest rates and a flood of foreign investment into property, has left people complacent that their household wealth is sufficient - even if it may be tied up in their homes, leaving them potentially cash-poor.

Should property prices soften, as Mr Tharenou predicts, household consumption - the money people spend in the broader economy - could very quickly dry up as people focus again on saving, impacting the nation's economic growth.

"The RBA has acknowledged that risk, that there is uncertainty around the consumption outlook," said Mr Tharenou.

"They thought [consumption] would rise to above average but it hasn't done that so far and I think that it's unlikely to do so, there's just not enough income growth."

Meanwhile, the rate of household debt continues to grow faster than incomes.

"People are taking on debt to buy houses but without their wages growing," said Mr Tharenou. "I think low wages are a much more structural problem than people realise."

Property bubble? household debt? - bank bosses not stressed at all

  Property bubble? household debt? - bank bosses not stressed at all We are bombarded almost daily with news on the perils of mortgage stress and record levels of household debt. But the executives that run the big banks don't seem stressed in the slightest. Quite the opposite. Bubble? What bubble?Their experience of delinquent mortgage lending remained benign in 2017 despite warnings from the prudential regulator and the Reserve Bank which have respectively forced banks to limit the growth of higher risk investment and interest only loans and kept interest rates low.But some things can't be denied.

When interest rates increase, there are real-world effects on the ways that consumers and businesses can access credit to make necessary purchases and plan their finances. A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home.

UBS warned that optimistic projections for real estate in big cities can create "ever-greater price fantasies." "Should sentiment change or interest rates increase, a correction is practically inevitable. In the past, rising interest rates almost always triggered a crash in housing markets," the authors said.

"There is a lot more capacity in the labour market than many think, there's lots of underemployment and despite recent tightening, that hasn't resulted in wage growth."

And with the housing boom over, the reliance on property as the bulk of household wealth looks to be under threat.

UBS expects house price growth to moderate from double-digits to around 7 per cent in 2017, and not reach more than 3 per cent in 2018.

Recent data show evidence of a slowdown in house price is fast-emerging. House prices in Sydney fell 0.1 per cent over September, the first fall since late 2015, according to Corelogic figures.

And over the third quarter, Sydney's median house price fell 1.9 per cent to $1,167,516, according to Domain.

Traditionally, Australian monetary policy has followed that of the United States, which has begun its own rounds of interest rate rises.

But despite markets pricing in potential hikes in the near future, UBS doesn't see the RBA becoming swept up in the global tightening cycle.

"We won't see the RBA blindly follow the US, especially since people will really feel a hike in interest rates," said Mr Tharenou.

Melbourne property shows signs of cooling .
There are signs the white hot Melbourne property market has started to slow, according to the latest figures from CoreLogic.Average home prices in Melbourne rose just 0.3 per cent in the past month and were stagnant in the week to November 12, according to property data group CoreLogic.

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