• The recent fall in the demand for housing relative to the supply is consistent with house prices continuing to decline in the coming months. While prices may only edge lower this year and next, higher interest rates will probably mean they fall more sharply in 2020 and 2021. Units look much more vulnerable than single-dwellings, while Melbourne appears to be the most exposed of the eight capital cities.
• With house price inflation on the CoreLogic measure having slowed from 11.4% in May last year to 0.8% in March, there are hopes that policymakers have successfully engineered a soft landing. And at current levels auction clearance rates imply that house price inflation may soon rebound to around 5.0%.
• But as only 25-30% of sales happen under the hammer, auction clearance rates don’t provide the full picture. The sales to new listings ratio is a broader gauge of the balance between demand and supply and has proved to be a better predictor of prices. With more homes currently being listed each month than being sold, this ratio is consistent with house price inflation falling below zero in the next six months.
• The high number of units being listed for sale relative to the number being sold each month suggests that price inflation for units may fall much further than for single-dwellings, perhaps from +2.6% in March to -6.0%. Unit price inflation may fall to -4.0% in Sydney, to -7.0% in Brisbane and to -8.0% in Melbourne.
• At the other end of the spectrum, the recent strength of demand relative to supply suggests that house price inflation in Adelaide may accelerate over the next six months, from 1.7% in March to around 6.0%, and in Hobart it may rise from 13.0% to around 17.0%.
• Of course, no one single indicator can tell us exactly what is going to happen to house price inflation in the coming months and the sales to new listings ratio tells us nothing about the next few years. But it does provide a better guide to the next six months than any other indicator and there are reasons to believe that further ahead demand will continue to weaken relative to supply.
• In particular, the banking Royal Commission may lead to tighter credit conditions, a change of government may make the tax system less favourable for buyers and at some point, perhaps late in 2019, the RBA will start to raise interest rates. As well as reducing demand, higher interest rates may also increase supply if the higher cost of servicing their loan forces some owners to sell or default.
• The risk is that the resulting weakening in demand relative to supply causes prices to fall faster in 2020 and 2021. By late 2021, prices for the combined capital cities may be about 10% below their peak. But the price falls will probably be larger in Sydney and Melbourne and bigger for units than single-dwellings.
Interest rates are going to fall not rise. That said, mortgage rates may well be at the bottom today. By the time we hit 2020 then the global cycle will probably be coming apart so you can replace interest rates with economic stress for much the same outcome. Prices down.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
