Bloxo: Housing boom over

Bloxo today provides some more good work, this time on the housing market where he calls an end to the boom:

The boom is over, but a soft landing is expected

A housing boom was always part of the rebalancing plan. When the mining boom was strong, interest rates were lifted to hold back the housing sector. This helped to make way for the mining upswing without excessive inflation. As the mining boom ended, interest rates were cut, which drove strong growth in housing prices and motivated a large upswing in housing construction, to help fill the gap left by mining.

However, the housing boom cannot go on forever. With Sydney and Melbourne housing prices having increased by 46% and 32% since mid-2012, respectively, some cooling is now needed. If not, these prices could become over-inflated and eventually threaten financial stability. Likewise, although the residential construction ramp up has helped to reduce a previously accumulated housing undersupply, another step up in housing construction could mean an eventual oversupply.

Concerns about excessive housing price growth in Sydney and strong growth in investor activity, saw the prudential authorities tighten lending standards over the past year to contain growing risks. This factor, combined with recent mortgage rate increases by the major banks (in response to higher capital requirements), the recent ramp up in housing supply and some reduction in affordability due to the housing price rises, have seen the housing market cool in recent months. We expect housing price growth and construction to slow noticeably in 2016, but see sharp price falls as unlikely, given continued low mortgage rates.

The slowdown in housing price growth and construction means that these will contribute less to GDP growth in 2016, although the lagged wealth effect from previous housing price gains could support some spending (via reduced household saving). As the housing sector pulls back, the rebalancing act moves to its next stage: a lift in the services sectors. This is creating jobs, which supports household incomes and should mean that the housing boom ends with a soft landing.

This is what we might call the conventional happy case. And Bloxo is consistent to the extent that he now expects another 2016 rate cut keep some air in the bubble. Obviously those house price forecasts look overly bullish to me. Perth is more likely to fall -10%. Adelaide should fall too though less so. Sydney will likely fall or at best tread water given it was the epicentre of the now popping investment loan and Chinese bubbles. Melbourne will trail whatever Sydney does by a quarter or two.

That obviously means the forecast growth impacts will be less than Bloxo expects as well. We expect residential construction to begin removing growth from mid-year so a 0% contribution to 2016 GDP is more realistic. As well, falling house prices will eat away a consumption and the services employment boomlet will ebb.

Still, the full report is worth a look if you’re after the happy case.