Australia mortgage slump points to steeper property downturn

* Number of home loans down 5.9 pct in Dec to 5-year lows

* Disappointing housing finance data another headache for RBA

* UBS downgrades expectations for housing credit, prices

SYDNEY, Feb 12 (Reuters) - Australian home loans slid sharply in December in a sign the downturn in the country's once booming property market has further to run, creating more challenges for policymakers worried about the wider economic impact of a housing slump.

Home loans, a lead indicator for housing prices, tumbled 5.9 percent in December from November to A$17.4 billion, the weakest in more than five years, official data on Tuesday showed. The year-on-year plunge of 19.8 percent was the biggest since the 2008 global financial crisis. Lending to first-home buyers too retraced sharply to be down 12.6 percent from a year ago.

The disappointing numbers will be a worry for the country's central bank which, last week, stepped up a warning on the housing market while signalling policy would be expansionary for a long time yet.

One of the concerns for the the Reserve Bank of Australia (RBA) is the uncertainty around spending by heavily indebted households. But falling home prices could also start weighing on construction activity, which would eventually impact the business sector.

Separate figures out on Tuesday showed business conditions revived in January after an alarming drop the month before, but still pointed to cooling ahead.

"The housing outlook for Australia continues to deteriorate and this means we can expect the positive housing impact of 2016/17 to turn into a drag on housing inflation," said Chris Rands, fixed income portfolio manager for Nikko Asset Management.

Housing makes up over 20 percent of Australia's total inflation basket which includes four broad categories - rents, new dwelling purchases, utilities and maintenance and property rates.

"From a historic perspective, when Australian house prices are declining, the RBA typically moves to make financial conditions easier, not hike rates," Rands added.

Indeed, the RBA brought the prospect of rate cuts back to the table last week in a dovish shift away from its previous tightening bias, which prompted financial markets to price in the chance of a full 25 basis-point cut to the cash rate later this year.

The RBA has kept policy at a record low 1.50 percent since last easing in August 2016.

Tuesday's dismal data also led UBS economist George Tharenou to downgrade his long-held forecast for a peak-to-trough decline in home loans to 25 percent now from 20 percent earlier.

"We're even more bearish on home loans, prices, credit and the RBA," Tharenou said.

"The accelerating fall in home loans shows tighter credit is playing out," he added.

"We cut our peak-to-trough forecast of home prices from falling 10 percent or more if regulators don't ease, to dropping 14 percent, even assuming the RBA cuts."

Australian banks, which heavily rely on mortgages to grow their business, have clawed back lending over last year as a powerful public inquiry unearthed a series of malpractices forcing them to tighten lending standards. (Reporting by Swati Pandey; Editing by Sam Holmes)