Houses could fall by 10pc

UBS warns on negative gearing, lending changes

HOUSE prices could fall 10 per cent as a pullback in lending and the prospect of limits on negative gearing take a toll, according to new research.

The number of home loans granted could drop 30 per cent as the supply of credit tightens, UBS says.

Analysts at the investment bank have warned the economy could be set for a record house-price downturn, raising the risk of a reverse wealth effect and credit crunch.

The predictions come amid a regulatory clampdown on lending to investors and riskier borrowers, a move by banks to lift mortgage rates, and a cooling housing market – where national dwelling prices have been falling for months.

In a report for investors, a team of UBS experts led by economist George Tharenou estimates borrowers with “very high” mortgage debt, at more than six times their incomes, account for 33 per cent of the value of all housing debt.

But banking regulators may want the share of loans made at very high debt-to-income ratios to fall to only 10 per cent, they say.

The clamps on high-debt mortgages come as the national ratio for dwelling prices relative to incomes hovers near a record high of about 6.5 times, the analysts say.

In Melbourne and Sydney, the ratios are closer to eight times and nine times, respectively, the report says.

From mid next year, new comprehensive credit reporting rules could reduce borrowing capacity by about $100,000 for many households as credit card limits and other debts are taken into account, it says. The UBS analysts also note plans by the federal opposition, under Bill Shorten (left), to limit negative gearing tax concessions to new housing and to halve the capital gains tax concession to 25 per cent.

As it stands, the top 10 per cent of income earners snare 48 per cent of the total dollar gain from negative gearing tax breaks, the report says.

Middle income earners receive an average increase of 4 per cent in individual incomes from negative gearing perks, it says.

When negative gearing arrangements were limited in 1985 and a capital gains tax was introduced, the value of investment home loans issued dropped by 30 to 40 per cent – probably amplified by the Reserve Bank hiking interest rates at the same time, UBS said.

As the investment share of home loans has since tripled, the impact of any curbs on the broader housing market could be magnified.