Morgan Stanley: Australian Housing Boom has Peaked

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Wednesday, September 23rd, 2015
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Australia’s housing boom has peaked, with the challenge now to pull off a `soft landing’, investment bank Morgan Stanley says as it predicts further interest rates cuts and a mini-budget stimulus.

While official interest rates remain at a record low two per cent, tightened lending standards are prompting a cooling-off period amid slower net migration, its analysts note in a research report.

“We are now calling the peak in the housing cycle, and expect further falls in auction clearance rates and house price momentum, with a negative impact on construction occurring over 2016,” the report said.

The analysts say the housing slowdown comes at an awkward time for the Australian economy as it transitions out of the mining boom.

“We believe recession risks are elevated as regulators attempt a difficult soft landing of the housing market amidst external and income challenges,” the report said.

“While we believe policymakers have meaningfully tightened credit conditions and are willing to sacrifice some growth to lessen the risk of a ‘crash’ down the track, the challenge is to pull off a ‘soft-landing’, as seen in 2003-04.”

Morgan Stanley argues fiscal stimulus is necessary and the federal leadership spill could be a catalyst to unlock a major infrastructure stimulus.

It predicts new prime minister Malcolm Turnbull may use the mid-year economic forecast in December as a mini-budget with a new growth agenda, although Mr Turnbull on  said it was not something he had considered.

The investment bank believes Australia has about $80 billion of headroom under its triple-A credit rating and could allocate a good part of that to an infrastructure stimulus.

It also argues the RBA will need to cut rates by another 50 basis points by mid-2016 as the housing slowdown impacts on growth, predicting unemployment will rise to 6.8 per cent – from 6.2 per cent currently – and growth will likely miss its forecasts.

RBA governor Glenn Stevens last week said regulatory measures to curb growth in investment home loans are doing their job, and Morgan Stanley believes they will be effective in cooling the market.

Many lenders have hiked interest rates for investors and made it harder for them to get loans while cutting rates for owner occupiers in response to a crackdown by the financial regulator, which has set a 10 per cent `speed limit’ for investor property loan growth.

CoreLogic RP Data said the Sydney housing market is at or slightly past its peak.

The booming Sydney and Melbourne property markets are masking much weaker conditions in other capital cities.  Sydney and Melbourne were the only cities to post home price rises of more than one per cent in the June quarter, official figures show.

Home prices rose by almost nine per cent in the harbour city, more than twice the rate of Melbourne’s 4.2 per cent gain.

That helped nationwide capital city home prices rise 4.7 per cent in the June quarter, well above market expectations of a 2.4 per cent gain.

Over the year to June, the residential property price index was up 9.8 per cent, the Australian Bureau of Statistics said.

But an almost double digit rise in nationwide prices hides some large disparities in Australia’s housing market, Commonwealth Bank senior economist John Peters said.

Perth and Darwin had the weakest outcomes, with a fall in prices in the June quarter and the year to June.

“The combination of record low interest rates, robust investor activity, demand outstripping supply, and strong foreign investment supercharged a huge lift in Sydney house prices,” Mr Peters said.

“Residential property growth price growth has been more restrained throughout Australia’s other major capital cities – with annual price growth running at very comatose levels.”

Conditions in Sydney and Melbourne may soon be impacted by measures by regulators to improve lending standards and reduce the participation of investors in the housing market.

“Anecdotal evidence in recent weeks has hinted that the Sydney and Melbourne property markets have shown some signs of moderating with weekly auction clearance rates coming off the boil,” Mr Peters said.

CAPITAL CITY HOME PRICES

  • Sydney – up 8.9pct in June qtr, up 18.9pct in the year
  • Melbourne – up 4.2pct and 7.8pct
  • Brisbane – up 0.9pct and 2.9pct
  • Canberra – up 0.8pct and 2.8pct
  • Adelaide – up 0.5pct and 2.7pct
  • Hobart – steady and up 1.5pc
  • Darwin – down 0.8pct and down 1.8pct
  • Perth – down 0.9pct and down 1.2pct
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