House prices recovery just around the corner

May 29, 2019

By Liz Jordan, Staff Writers

3 min read

THE Coalition’s shock election victory, likely interest rate cuts and APRA’s pending easing of credit curbs have turned around Capital Economics’ outlook for the housing market, with a further price fall of just 3% anticipated.

That would equate to a 13% peak-to-trough fall, and a much shorter and tighter overall slump than the firm’s previous forecast of a national drop of 15% that would be drawn out until at least March next year.

Senior Australia & New Zealand economist at Capital Economics, Marcel Thieliant, said the firm expects the downturn to end around the turn of the year, and house prices may rise by 3% from their trough in 2020 and by 5% in 2021.

“While rising house prices should boost consumption growth, the drag on dwellings investment and inflation may linger until mid-2020. As such, the risks to our below-consensus forecast that the RBA will slash rates to 0.75% are to the downside.”

Capital Economics data has house prices across the eight capital cities falling for 21 months since their peak in July 2017, making the current downturn the longest in modern history, and the 9.4% fall in house prices in the eight capital cities from their peak marks the largest fall on record.

It estimates that house prices fell by another 0.7% in May, bringing the total peak-to-trough drop to around 10%.

Earlier this year, Capital Economics lowered its GDP and dwellings investment forecasts, expecting the housing market downturn to have a larger negative impact on the economy than widely believed.

Prior to the election and sensational shift in sentiment, AMP Capital had forecast a top-to-bottom fall in prices in Sydney and Melbourne of 25%, spread out to 2020, while NAB revised its own expectations downwards to falls of 20% and 15% respectively. follows Moody’s Analytics announcing its own downgraded forecast earlier this week.

Theliant outlined four reasons for the shift in outlook, including rising auction clearance rates that are now at levels which on past form are consistent with rising house prices, and sales-to-new listings have picked up; policy settings are set to become more supportive, including expected interest rate cuts and APRA being set to relax lending restrictions for mortgage loans; developers responding to the slump in demand by curtailing supply, and previous falls in house prices making housing less overvalued.

“We estimate that by the end of this year, the number of newly-built houses will no longer outstrip the demand from household formation, second homes and demolitions,” it said. “While household income growth has been weak in recent years, the current downturn is already the deepest in modern history. If the RBA keeps cutting interest rates, buying a house will soon be the cheapest since the global financial crisis across the country.”

Capital Economics expects banks will gradually loosen credit constraints as the scrutiny from the Royal Commission subsides, and that while it remains a possibility that subdued wage growth would result in a weak recovery in home prices, slow growth in household income was not a constraint during the previous boom.

“Once house prices rebound, the headwind from falling housing wealth on consumer spending will turn into a tailwind. We estimate that the wealth effect could turn from a 0.6% drag on private consumption this year to a 0.3% boost in 2020.”

Source: Australian Property Journal