The housing market isn’t crashing, but it is cooling, which could force the Reserve Bank of Australia to cut interest rates again, Citi economists say.
Stretched valuations that have fuelled speculation of an impending crash had been driven by under supply in the market, which peaked at 49,000 dwellings in 2013-14, versus the RBA’s estimate of 13,000, economists led by Paul Brennan said in a research note.
Citi expects the under supply will narrow to around half that rate on average over the next two years. Population growth will slow as the mining boom winds down and immigration levels drop, while regulatory restrictions will lower demand for property from investors and foreign buyers.
This all sounds rather premature to me. All we know at this stage is that the market has unseasonally stalled:
And that the best leading indicator is spectacularly weak for Sydney:
There are good reasons to fear a crash:
- the run up in prices was driven by investors and Chinese and both are deserting the market as macroprudential and capital controls bite;
- an investor controlled market has looser hands than a owner-occupied one;
- consensus says that banks will now chase owner occupiers with discounts but they have barely participated in this cycle and are quite unlikely to do so at this grotesquely overvalued point;
- if Sydney goes, we all go;
- the broader economy is headed into an employment triple shock by mid next year as residential construction joins the mining capex cliff and car industry closures;
- the terms of trade shock is ongoing with falling income to persist and the big miners that carry a lot of household kudos are literally being wiped out, plus the Budget is going to miss big again;
- population growth is falling fast and the residential boom has just about ended the “housing shortage”, and
- Perth prices will keep crashing.
It seems to me quite plausible that we could see a relatively swift swing to falling prices that at least blows off the froth that formed this year. Weighing against a deeper crash are:
- more rate cuts;
- a lower dollar helping at the margin, and
- intense Australian property belief.
They will probably be enough to prevent an imminent crash but, boy, I wouldn’t want to be long right now and 2017 looks like big trouble as the monetary chamber runs empty.
