UBS economists have reiterated forecasts for two cash rate cuts in November and February, releasing new analysis that predicts the Reserve Bank could cut interest rates even earlier if house prices continue to fall.
UBS surveyed more than 100 buy-side client investors to identify sentiment for house prices and the Reserve Bank in February.
Bearishness toward house prices has settled in, with 93 per cent of respondents maintaining negative sentiment on the outlook for house prices over the next 12 months. Only 3 per cent responded as “bullish”.
The average weighted response of investors implies home prices are expected to fall a further 7 per cent in the coming year, “a bit more negative than the sell-side consensus”, but similar to the UBS prediction of a 14 per cent national peak-to-trough decline.
While credit availability remains the top concern for investors, sentiment toward house prices is unlikely to become more negative without an additional catalyst like a policy change, spike in unemployment or a global downturn.
“Overall, we continue to expect credit tightening to see ongoing weakness in housing, leading to a negative wealth effect on consumption, resulting in below trend GDP growth, which sees the unemployment rate rise, and the RBA cut rates in November and February 2020,” UBS analysts said.
Westpac chief economist Bill Evans said last week that the Reserve Bank will be forced to make two cuts in interest rates as falling house prices create “negative wealth effect” and drag the economy.
In its last monetary policy meeting, the Reserve Bank recognised the impact on economic stability falling house prices, describing it as “unusual” for house prices to fall so significantly in an environment of low mortgage interest rates and declining unemployment.
By investor type, UBS said hedge funds were unsurprisingly much more negative than long-only investors for both house prices and cash rates.