Commonwealth Bank: House prices to fall further

By Gareth Aird, senior economist at CBA:

Key Points:

  • Australian residential property prices have fallen over the past six months.
  • Additional declines appear likely over the next 1½ years due to a further tightening in lending standards, a continued lift in supply, potentially higher mortgage rates and more rational price expectations from would-be buyers.
  • A hard landing, however, looks unlikely and is not our central scenario.

Overview:

Dwelling prices go through both long-run super cycles as well as shorter-term cyclical trends.  The recent evidence suggests that Australia’s latest residential property short-run cycle has come to an end (chart 1).  After a little over five years of incredibly strong property price growth, driven by Sydney and Melbourne, dwelling prices have been deflating.

It is our view that prices will to continue to deflate over the next 1½ years.  Credit standards are likely to be further tightened, supply will continue to lift, mortgage rates are more likely to go up than down and buyer expectations have adjusted downwards from exuberance to more rational levels.  We do not expect a hard landing, however.  Population growth, driven by net immigration, is expected to remain strong.  And rental growth is still positive, which ensures yields look reasonable in a low interest rate world.  We also expect the unemployment rate to gradually drift lower, which means that the risk of default is low.

Given that household debt sits at a record high relative to income and the RBA cash rate is at a record low, there is also a valid question as to whether we are also at the end of the property super-cycle.  That is, the capacity for dwelling prices to inflate beyond growth in incomes, as has previously been the case, is far more limited in the absence of even lower interest rates.  As interest rates cannot go much lower, at least not in a material sense, we are unlikely to see the sort of growth in dwelling prices over the next 30 years that we did in the previous 30.

The intention of this publication is not to explore the long-run property super cycle (note that the BIS identify Australia as having the longest-running housing boom – 6,556% over the past 55 years – chart 2).  Rather, we focus on what we think is likely to happen over the short-run.  While predicting property prices can look foolish retrospectively, our quantitative assessment of the market overlaid with our qualitative views leads us to conclude that further falls in dwelling prices nationally of around 5% look probable, driven by Sydney and Melbourne.

Latest data

Dwelling prices in the eight capital cities combined fell by 0.3% in April. This was the sixth consecutive monthly fall. Dwelling prices are now down 0.3% over the year – the first time they have declined in annual terms since 2012.  Units have generally been performing better than detached houses. Over the year, unit prices were up by 1.9% while detached houses were down 1.0%.  Units are generally cheaper than houses and the bottom end of the market is holding up better than the top.  That’s in part due to first home buyer assistance measures in NSW and Victoria that came into effect last year.

Price falls in Sydney and to a lesser extent Melbourne have been behind the national move lower (chart 3).  Dwelling prices in Sydney have fallen for eight consecutive months.  They are down 4.3% from their peak in mid-2017. Sydney dwelling prices rose by around 75% between early 2012 and mid-2017.  So with that perspective the current deflation has so far been quite mild. Prices have fallen for five consecutive months in Melbourne.

Why are prices falling?

To better understand why dwelling prices have been falling it’s helpful to look at why prices rose so much in the period from early-2012 to mid-2017.  We start with monetary policy because the decision to cut interest rates had the biggest impact on property price appreciation.  Between November 2011 and August 2016 the RBA slashed the policy rate from 4.75% to a record low of 1.50% – 325bpts.  Mortgage rates fell as a result (chart 4).  Each interest rate cut essentially meant that for a given level of income a borrower could service a bigger mortgage, all else equal.  And it also meant that the yield on property looked attractive relative to term deposits as the return on cash fell.

Falling interest rates stimulated demand for property from both owner-occupiers and investors.  It encouraged a lift in the flow of credit and that helped push up dwelling prices, particularly in Sydney and Melbourne.  However, it wasn’t just a domestic demand story.  Demand for Australian property, particularly in our two largest cities, was augmented by foreign buyers.  As a result, three sources of demand were putting upward pressure on prices at a time when supply was relatively constrained and struggling to keep up with population growth.  Some, but not all, of those dynamics have started to shift and that has put downward pressure on prices.

First, the RBA’s policy rate has been on hold since August 2016.  But some regulatory changes introduced to slow the flow of credit to investors as well as growth in interest only lending has resulted in higher mortgage rates on some types of loans.  These higher mortgage rates have dampened the appetite for credit amongst investors and that is weighing on prices, particularly in Sydney and Melbourne (chart 5).

Second, supply has lifted and dwelling investment has caught up to underlying demand (chart 6).

Third, foreign investment in Australian property looks to have waned a little (chart 7).  State Government stamp duties levied to foreign investors rose to between 7-8% in both NSW and Victoria in the middle of last year.  This has had a dampening impact on demand.  Four, momentum has shifted (see below).

How far will prices fall?

Forecasting economic outcomes is an inexact science.  And forecasting property prices is particularly challenging because there are so many variables that impact prices.  Notwithstanding, we believe there is enough evidence to suggest that property prices are likely to head lower over the next 18 months, particularly in Sydney and Melbourne.

First, momentum has slowed (chart 8).  Like most asset markets, momentum is a powerful force.  It has clearly shifted down and the euphoria around real estate has waned over the past year.  The Melbourne Institute of consumer sentiment provides a quarterly read on what households perceive to be the best place to park savings.  In March 2018 (latest available) just 11.4% of households surveyed nominated real estate as the best place to put savings – that was just off its lowest level in 44 years (chart 9).


Second, credit growth will slow further if we see any additional tightening in lending standards, which at this stage looks more likely than not.  From a financial stability perspective, a tightening in lending standards is not a bad thing.  But timing is key.  Any potential tightening at a time when momentum is already coming out of the housing market would put downward pressure on prices.  Third, auction clearance rates have moved lower.  In the past, auction clearance rates have provided a good near term guide to price direction and magnitude.  Four, supply is rising significantly in Sydney and Melbourne.  The recent trends in the building approvals data points to dwelling commencements and completions running at elevated levels over the next few years (chart 10).

Our base case for property prices has them down by 3-6%pa in Sydney and Melbourne by end 2018. That would take the fall in Sydney prices from its July 2017 peak to around 7½%.  For Melbourne, prices would be down by around 5% from their November 2017 peak.  Some further dwelling price deflation looks probable in 2019 and we see the peak to trough being around 10% in Sydney and a little less in Melbourne.  For Brisbane, we see prices trending sideways over the next 1½ years. Dwelling prices are likely to inch higher in Perth as vacancy rates decline and rents trough.  Nationally, we think prices will end the year down by around 2½% with a similar outcome likely in 2019.  That would mean the total correction in dwelling prices is not too dissimilar to the corrections of 2010 and 1989 (chart 11).

As always, context is key.  A fall in prices in Sydney of 10% from peak to trough would take them back to their September 2016 level.  And a fall of around 7½% in Melbourne from peak to trough would take prices back to their December 2016 level.  We don’t see prices softening much in the other jurisdictions as they simply didn’t experience the same growth in prices in the prior five year period.

Why not a crash?

A crash could be broadly defined as a fall from peak to trough of around 20%.  Many international observers (and a few local ones) expect this result.  But that would be a significant correction and would require a lift in the unemployment rate or materially higher interest rates.  We have neither outcome in our central scenario. We see the unemployment rate as more likely to drift a little lower from here while any tightening in monetary policy is likely to be very gradual.

In addition, Australia’s high population growth rate, which is driven by a large intake of around 200k migrants each year, looks set to continue.  Despite concerns being raised about Australia’s strong population growth, there is bipartisan support from both major political parties to run a big immigration intake each year.  This props up the underlying demand for housing and has kept a lid on vacancy rates in Sydney and Melbourne despite record levels of dwelling investment (chart 12).  In fact, as dwelling commencements edge lower policymakers may revert to talking about a “housing shortage” given the sheer growth in the number of people living in both Sydney and Melbourne.


Finally, rental growth remains positive in Sydney and Melbourne (chart 13).  We don’t see rents falling in Sydney or Melbourne without a lift in vacancy rates and that does not appear likely without a change in Australia’s immigration policy.  As such, rental growth is expected to remain positive in Sydney and Melbourne which provides a natural floor on how far dwelling prices can correct lower.

Impact on the economy and monetary policy

Changes in dwelling prices have an impact on the spending decisions of households via the wealth effect (the notion that changes in demand are influenced by changes in the value of assets).  The theory states that when the market value of assets rise, it leads to the feeling of being wealthier which should encourage spending and reduce savings.

In Australia, the falling saving rate is evidence that a wealth effect has been in play.  Now it may be the case that the saving rate declined simply so that households could maintain a modest level of consumption growth in the face of falling income growth (chart 14).  But the point to note is that firmer dwelling price growth gave those households that own property greater scope to reduce savings given their balance sheets were optically strengthened.  Certainly there is a high likelihood that the reverse would be true and households would rein in spending if dwelling prices were falling.

Comments

  1. PrinceOfPersia

    If the overall price has been reduced by 5% in about 8 months, it will pick-up the momentum and thus keep decreasing! So a 20% for a crash is very conservative assessment! The crash (when it happens – and it WILL), will be between 30% to 40%. The Desperation has already commenced, lol. Just love it.

    • 50% minimum.

      Its not just the footings in our economy which are based on house prices – but the very bed rock.

      House price falls will mean downgrading of our banks, massive unemployment, massive defaults, tax Armageddon.

      Literally everything has been bet on house prices, the house, the farm, the super – even Granny’s retirement – and when you’ve turned corner looking at the clock tower at Flemmington 5 lengths in front you feel like a million bucks. We’re all winners and we’re gunna be rich. Then you fall and break your leg. You lose everything and some guy walks out on the track with a white sheet and a shotgun.

      Even migration will turn against us – no jobs, huge crime rates and poverty – drives down house prices.

      • Because everything has been bet on house prices is exactly why these falls will never eventuate. The government will do absolutely anything and everything to ensure that they don’t happen.

      • Yes, bjw.

        And those that think the government helpless or friendless or painted into a corner in relation to this are very misguided and are going to be proven spectacularly wrong.

        Indeed, the government hasn’t even Been playing full-strength yet. They’ve not even publicly acknowledged that they have done anything to support house prices.

        They will eventually do this and then a whole new world of possible policy interventions opens up. It ain’t over.

      • markjohnstonMEMBER

        The report says…. Sydney dwelling prices rose by around 75% between early 2012 and mid-2017. So with that perspective the current deflation has so far been quite mild.
        They haven’t touched on the mob (stressed) reaction to loosing 50k on your recent purchase? BBQ’s will speed up the declines. “Bill and Wendy are selling, why?”

      • @bjw678 @Peachy

        Go on then – give me ONE example of what they can do – please – I’m all ears.

        Lets go through the options.

        1) First home buyer stimulus.

        Requires massive government debt – huge, in the order of $50 Billion minimum and would see an immediate down grade on our credit ratings (increasing interest rates on current buyers). Markets would absolutely spank the AUD. Literally can not happen.

        2) Increase migration. LOL – no chance. None.

        3) Remove APRA requirements on loans resetting to interest and primary. Again – foreign markets would absolutely spank Australian banks – simply can not happen. They never wanted to do it, and the ONLY reason they did was because of massive foreign ructions regarding the absurdity of extreme levels of danger in the banking system because of it. No Chance.

        4) Allow foreign buyers to purchase existing homes without approval – opening the flood gates. Pretty much already happening and already foreign buyers have collapsed.

        Politically, Financially, Socially, and Economically there is literally nothing the government can do. Just saying “they will do something” is totally meaningless – utterly. Put it up and lets see it and debate it. Otherwise its rubbish.

        However in response how are you going to curtail massive inflation in the input costs of business from oil price spikes ? How are you going to curtail loan defaults on interest and primary resets ? How are you going to curtail rising interest rates from US rate rises ? How are you going to curtail domestic inflation from AUD correction ? How are you going to bring back Chinese buyers ?

        Its done. Its finished – its been correcting for over 8 months and the government can’t do a damned thing – in fact every dodgey side ways, underhanded, surreptitious, nefarious, corrupt crap they have done in the past is now coming home to roost as part of a Royal Commission – they are going to lose power, and there is a strong chance that there will be an ICAC and mroe Royal Commissions into the corruption already playing out.

        So go on – lets have it.

        Tumble weeds.

      • @PL: It’s so simple I can’t believe I even have to explain this.

        Bring in another 200,000 people next year. Take 20,000-30,000 units out of the dwelling supply pipeline.

        People gotta live somewhere. More people move in together to service the higher rents; higher rents support higher mortgages.

        It’s not the only way, either. FHB subsidies don’t cost anywhere near what you suggest. Shared equity shenanigans have barely even begun to be explored. And then there is always QE/government as lender of last resort (like the last time – remember AOFM TMBS purchases?)

      • mark777MEMBER

        Double the immigration intake? Seems unlikely, and wouldn’t happen overnight, not enough resources to intake that many Indians and Chinese, or jobs. Considering your next point.
        Reduce stock, yes, already happening.
        QE, Phil has shown he wants tighter lending standards for housing, once that’s in play, he may revert to QE, but only if the former is working.

      • @mark777 – I don’t mean another 200,000 in addition to the scheduled 200,000 for a total of 400,000.

        I just mean the regular annual 200,000 people. With no place for them to live. And take 20,000+ dwellings out of the supply pipeline.

        Rents and prices go up.

        (Some non-diverse non-vibrant Australians have to go live on the street, in a tent, in a park, whatever. Who cares?!- they’re largely invisible. Prices go up, that’s visible).

      • @Peachy

        I can believe you have to explain it because you explanation is intellectually and economically anathema.

        First up – we are already bringing in 200k people and prices are falling. Literally you have said – “Do nothing, or the same thing and it will change” – its absurd.

        Reduce housing supply – reduce jobs.

        Construction is the single largest employer in our economy – along with retail and health.

        Reduce jobs means you can NOT bring in more people – its as simple as it gets.

        Also rents are not something which you can simply push up. How many times does this need to be explained – rents are totally inelastic – without wage increases, and there have been none – people will simply find cheaper accommodation. Either through downsizing or moving.

        Nothing you have said will increase prices – nothing.

      • PessimistMEMBER

        Peachy you are a capitulated bear clutching at straws!There is no more ammo left 🙂

      • Reduce housing supply – reduce jobs.
        Construction is the single largest employer in our economy – along with retail and health. Reduce jobs means you can NOT bring in more people – its as simple as it gets.

        Lol. It’s not a linear relationship – we can lose 20,000 construction jobs and it will make the housing shortage so much more acute that the tiny tick up in unemployment won’t make a jot of difference.

        Also rents are not something which you can simply push up. How many times does this need to be explained – rents are totally inelastic – without wage increases

        You can explain it again and again and it will be wrong every time.

        The quality of dwellings rented is elastic. Say 1-bed flats go from $400 to $600 and 2-bed flats go from $600 to $800. Suddenly nobody can afford the rent!

        No wukkas, mate: people can move from the previously-$600/week 2-bedder to a now-$600/week 1-bedder.

        People from the previously-$400/week 1-bedder can get a room in a $800/week 2-bedder to share with other similar unfortunates.

        As long as new people keep coming, it can go on.

        No wage growth required mate.

      • @pessimist – I’ve not capitulated. I’m just not declaring victory before the battle is over. It’s not over.

      • @Superannuation.

        Already tried that and it was shot down in flames – it isn’t coming back. With the current Royal Commission into banks do you seriously think they are going to allow the insane systemic risk into banking eventuate. Super into housing is literally taking pensions which must be secured in AAA rated investments and throwing them at Green at Crown – will never happen.

        ..

      • Lol. It’s not a linear relationship – we can lose 20,000 construction jobs and it will make the housing shortage so much more acute that the tiny tick up in unemployment won’t make a jot of difference.

        Glad you pulled a number out of your proverbial. Try 200,000. Either way the flow on effects are compounded through the economy – reduced demand for bricks, concrete, rebar, high-vis, meat pies, 4WD – as you say its not linear. And what happens when there are 20k or 200k more people on the dole ? Competing for the same self employed tradies jobs – all wages go down.

        Again – i repeat – we are already bringing in your magical 200k migrants and prices are collapsing. Are you suggesting that we increase migration into a collapsing employment market will increase peoples ability to pay rent ? Totally absurd.

        The quality of dwellings rented is elastic.

        This is not English.

        No wukkas, mate: people can move from the previously-$600/week 2-bedder to a now-$600/week 1-bedder.

        And then – all of a sudden – no one can rent out those 2 bedders – because no one can afford them. So the rent comes back down. You just defeated your own argument.

        Moreover families simply can not do that. They will move further out to find the same number of rooms and commute or relocate entirely. Destroying demand for those they left behind.

        As long as new people keep coming, it can go on.

        And those new people are going to pay for their rent with what ? Mung Beans ? If 20,000k jobs are being lost they will not have employment.

        In fact as employment starts going down people emigrate – its a basic fact of housing corrections.

        No wage growth required mate.

        How are people going to pay their mortgages ? How are they going to deal with rampant price increases through energy increase ? Through interest only to primary and interest ? US interest rate rises ?

        You simply sit their pontificating about how mass migration will maintain the housing bubble and refuse to address any of the most basic fundamental questions and when you do address something you get it completely wrong.

        So again – how about you address the issues – how are people going to pay for their mortgages when interest only resets, US rates rise, oil prices cause inflation ?

        How ?

      • Net immigration increased by over 25% from financial year ’16 to financial year ’17 – an increase of around 50k people – and in response substantial bull runs in both Sydney and Melbourne came to an end and prices started falling.
        If immigration is going to restart the market, it’s going to need to be about a 100% increase, and they’re going to need to all be rich already, seeing as unemployment’s started to creep up. But wealthy migrants seem to be staying away for reasons outside our borders, so I don’t see what our government is going to do to change it.

      • Rents will be relatively inelastic in nominal terms.
        Shelter will become more affordable as there will be more house sharing, particularly two families sharing a dwelling. Very common for recent immigrants to do this. Those renting out dwellings will be more accepting of the practice as it will be a choice between moar tenants or a vacancy.

      • PrinceofPersia and Pascal Lamy, as I have said many times on this site, this bubble is too big to allow to pop. You can blame both sides of govt for growing this housing bubble so much that it has swallowed up everything in its wake, and there really is still much more ammo the govt can pull out to keep prices ridiculously high.

        Why not increase immigration even more? Pascal, you say there is no chance, none. I wouldn’t be so sure. Heard of skilled migration? I’m not saying we need it, but the govt sure will; as in “we need skilled migration to get us back on track.” Or more students because it’s good for the economy, or whatever lies they wish to spout. In any case, name one time the govt has taken any notice of the populace wanting less immigration? They just go ahead and do what they want.

        Rents can’t rise? Doesn’t matter – that’s what negative gearing is for. The irony is that if prices were allowed to fall there would be less need for negative gearing, but no govt has let that simple fact stand in the way of growing this bubble.

        Allowing foreign buyers open slather. KRudd relaxed the laws and they haven’t been tightened since… well, maybe a tiny bit. There are many ways they could relax them even more. What about a FHOG for foreign buyers? Sure, the electorate would be in uproar, but that doesn’t mean it couldn’t happen.

        Super – that’s a biggie. Plenty of bikkies that can be used for housing, and who cares that it’s borrowing from the future? Some future govt can worry about that.

        Pascal, you say “its been correcting for over 8 months and the government can’t do a damned thing.” In those 8 months there have been falls of 4.3% in Sydney and less in Melb. Even by the time it finishes falling we’ll back to 2016 prices, which were hardly an “affordable” market.

      • JojoyubbyMEMBER

        Guys, think bigger! we can deflate the house price by 60% (USD denominated) without any of the locals even know about the drop. bring the AUD to 30c US.

      • @Pascal Lamy
        Basically your argument seems to boil down to, we are farked, and the government can’t do anything about it because if they do then because of the consequences we will be farked.
        Given we are farked either way expect the government to try to maintain the status quo.
        But feel free to elaborate on why exactly the government is unable to prop up house prices and how the consequences will be any different to allowing house prices, and the banks along with them, to crash into oblivion?

      • ‘@Superannuation. Already tried that and it was shot down in flames – it isn’t coming back. ‘

        Different story if people are about to lose their homes or rack up massive losses. You are foolish to think that the government won’t burn the household furniture just to keep the fire going a bit longer.

      • Nick1970MEMBER

        Rates still have to go to zero yet. And they can always turn on the printing presses. Debt jubilee is another. They will do whatever it takes to protect house prices.

      • The point is that the status quo is unsustainable. The distortions in the economy will self correct. The Fed couldn’t hold the poop in the horse. What makes anyone think that this inept group of politicians could hold a pissup in a brewery? Double immigration? See you at the polls.

    • Peak to trough minimum 70% falls in real terms. Overshoot a possibility in some markets.
      Get ready for inflation because the gubmit won’t allow large nominal falls and the RBA will reduce rates instead of increasing them. Cost of living will go through the roof even if the cost of shelter falls. The correction is once in a century though may be a slow burn like the Japanese.

      • DominicMEMBER

        There’s an awful lot of noise and misinformation around this subject but your comment sums it up perfectly. At the end of the day, house-price deflation will be met with a large adjustment in the value AUD. End of story. There is no other option.

    • 5% drop predicted (by a vested interest bank).
      On a price 45 % above fair value. This is a joke, not even a correction.
      Anyone have an elliot wave graph of housing prices – how about a 38.6 % retracement.
      And note – Net immigration to remain high. Govt needs to increase more to prevent this dreadful 5 % drop in an election year.

    • The root cause of massive high house prices is the massive 3rd world permanent immigration program.
      Until this insane program is reduced greatly, there will be little downward movement in house prices.
      Of course, if interest rates rise back to historic norms of around 7%, or unemployment rate goes up significantly, say 12%, there will be large falls in house prices but the plus 200,000 permanent immigration program (assuming most immigrants are quite well off) will absorb a lot of the housing sales keeping prices higher than they would without the cushion of massive immigration.

      • If there’s a significant rise in unemployment, say to 7%, immigrants who have permanent residency – and therefore can access our welfare even if they leave the country for a while – will go somewhere it’s easier to get a job, or go home where relatives can help them out. I think about four million such arrived in the last decade – even a small proportion of those leavng in a short period would kill NOM for a while, accelerating house price falls, rather than providing a cushion.

      • Robert – Australians who travel or live outside Australia may find it has an affect on their health care, child support and Centrelink payments. Their pension payments for example are reduced pro rata depending how long they been Australian citizens.
        I doubt very much there’ll be many recent or even long time here arrivals leaving Australia when things get tough, certainly not enough to cause any noticeable reduction in house prices.
        .
        I .

  2. pingupenguinMEMBER

    No they won’t. This is ‘straya, we have kangaroos. House prices don’t go down here.

  3. Ajaydee73MEMBER

    Is this a first? From memory the banks have only predicted house price growth in the past?

    • Exactly.

      It is a big surprise to see this from the most corrupt of the big 4 banks.

    • McPaddyMEMBER

      Aird has been pretty persistently insightful and honest. I was expecting him to have been moved on by now, tbh.

    • I guess they should know given they’re the ones shoveling the debt out the door, I’m sure the government will intervene though. I’d half expect my super to be stolen to restore a property investor’s confidence.

    • DominicMEMBER

      Perhaps this is a backhanded cry to the Govt for some respite i.e. the RC has beaten us up already and if it continues, the housing market will crack and you (the LNP) will pay the price at the next election.

      The banks metaphorically have the Government’s balls in a vice when you think about it carefully.

  4. Mining BoganMEMBER

    Ha!

    “Additional declines appear likely over the next 1½ years due to a further tightening in lending standards, a continued lift in supply, potentially higher mortgage rates and more rational price expectations from would-be buyers.

    Now it’s the next boom that is 18 months away!

  5. So Commonwealth predicates modest house prices declines over next 18 months.

    Fairly sensible analysis from a mob who knows what ‘their man’ Scott Morrison is thinking.

    Minimal declines expected while there remains a strong government policy commitment to the housing bubble.

    The hardening of credit standards can be reversed at anytime and there is a bipartisan commitment to the population ponzi that will easily soak up an excess supply in Sydney and Melbourne of which there is none.

    The only risk is our CAD and rising off shore rates driving up local mortgage rates but we have been hearing that for years.

    The AUD remains at mid 70s so clearly we are still finding buyers for our assets and our IOUs.

    Perhaps if we decided to move away from excessive reliance on monetary policy and therefore the household debt machine we might see real declines in asset prices inflated with debt but even most of the crashniks seem to think that is impossibly radical.

    Without reform of the Howard-Costello fiscal / monetary model that drives the economy on private balance sheets / debt we will continue to run a housing bubble economy until the AUD collapses.

    And that has not happened.

    Yet.

    • BrentonMEMBER

      Fair points, but I would challenge you on what you are actually saying, which is Australia can undergo another round of rampant credit expansion without issue. That lending standards (already shown to be criminally lax), must be further loosened to facilitate said credit expansion. That the divergence between income and loan ratios must be stretched even further. Are there no repercussions to this; bad loans, unemployment, tapped out consumers, recession? What about the end of business cycle event coming into view globally? Tighter credit markets globally?

      • Jumping jack flash

        “… the capacity for dwelling prices to inflate beyond growth in incomes, as has previously been the case, is far more limited in the absence of even lower interest rates. As interest rates cannot go much lower, at least not in a material sense, we are unlikely to see the sort of growth in dwelling prices over the next 30 years that we did in the previous 30.”

        This is the answer to that.
        The bank says, “no”.

      • Brenton,

        How about allowing people to claim a deduction for the interest on their mortgages?

        Just for starters.

        I originally wrote this as a bit of fun but even I don’t find it very funny now.

        https://theglass-pyramid.com/2015/05/23/bank-watch-qe-for-debtors-is-coming/

        There is almost zero commitment to even talking about what is driving this mess let alone actually do anything about it.

        You know,…….. my “money crank” stuff. Half the time the only engagement is from the #FakeLeft private bank apologists who work in or have family ties to private banking. And they quite naturally are trying to run interference with all their boiler plate crud.

        The only things that will pop this bubble are

        1. A collapsing AUD that drives up mortgage rates and the RBA target rate.

        2. Incompetence on the part of the bubble blowers….. And these guys are shameless professionals.

      • DominicMEMBER

        Agreed Brenton. Added to which it appears very much like we have another global crisis on the horizon and it is hardly likely our housing market thrives through that. You occasionally hear people talk about “another GFC” but the next crisis will be orders of magnitude more challenging given that the various bubbles blown since the last one are much larger and more wide-spread. One or two have commented that the next crisis is likely to be the ‘last’ crisis and I tend to agree.

    • There’ll be growth. It will be called “negative growth”…In an election year, this will need a response.Then the govt will open the policy floodgates again .

      • Get ready for petrol price growth. How much petrol tank equity have you filled up with?

    • “The hardening of credit standards can be reversed at anytime”
      Yes, but there is the other side of lending – borrowers. If enough investors get burnt long enough (and they are getting burnt as we speak) their appetite for excessive leverage shrinks. Then you could have as loose credit standards as you wish. eg. USA – cheapest credit you can get – but most borrowers don’t want high leverage any more.

    • Why do continue to live in the fantasy world that Australia exists in isolation and that nothing we do will be responded to by international markets. We are ONLY where we are today with high house prices BECAUSE of international markets – loose credit / Chinese demand. So lets cut the delusion.

      Minimal declines expected while there remains a strong government policy commitment to the housing bubble.

      Rubbish. Most people are anticipating considerable falls with current government policy – and the evidence backs that up. The single most resilient market in the country – Sydney – has been falling for 8 months, while the less resilient are down 30% or more.

      So false.

      The hardening of credit standards can be reversed at anytime and there is a bipartisan commitment to the population ponzi that will easily soak up an excess supply in Sydney and Melbourne of which there is none.

      The credit standards were put in place in response to pressure from offshore markets – yes this is a thing despite the ultra-orthodox belief that Australia exists in isolation being displayed. Global markets were aghast at the interest only orgy being engaged in by Australian banks – it posed an huge and serious credit risk and as such Australia has been left with no options. Its absolutely NOT a government policy which can be adjusted at will without serious global repercussions to our domestic banking.

      A collapsing housing market with a return of unfettered interest only and relaxed standards would be met with an immediate response from global markets. Simply will not happen. Allowing a return of interest only loans by APRA this month in no way mitigates the coming reset to primary and interest only.

      Further lending standards have been reset – it is simply beyond ABSURD that people are now suggesting that the government will allow banks to go back to dodgey lending practices. Moreover they will NOT be lending LARGER loans when real estate prices are collapsing – equity is going backwards – there fore so does credit. There is no argument on this – the government and banks can NOT relax lending standards and basic economics (falling prices) means they can not increase credit. Its just plain wrong.

      The only risk is our CAD and rising off shore rates driving up local mortgage rates but we have been hearing that for years.

      Yes – and its happening right now. Further it is NOT the only thing. Further credit downgrades on our banks will also cause it – as will increasing oil prices. An $80 pb oil price will see systemic economic turmoil – Europe just warned it would force airlines to shut down – thats jobs, tourism etc, etc. It is the single most critical factor in the global economy and it is set to keep on rising – you can NOT ignore the trend because it suits you.

      The AUD remains at mid 70s so clearly we are still finding buyers for our assets and our IOUs.

      AUD has lost nearly 10% in three months – 40% in 4 years – and everything EVERYTHING is pointing towards it going much lower.

      You can cherry pick you data, rely on your selective bias and obfuscate or ignore the facts to support your personally comforting narrative all you like – its meaningless to reality.

      House prices are falling, they have done everything they can to stop that – including flooding the migrant gates – and its not working – in fact they are looking like losing the election as a result and the banks are in a Royal Commission. Lets get real.

      Its just absurd.

      • Pascal, you remind me of myself ten years ago just before the GFC. I knew all the reasons why this bubble just had to pop. And then, when the GFC came along, prices started falling, as expected. It made sense. But, then, I hadn’t counted on the govt going to any length to not only stem the fall but to grow it bigger than ever.

      • Pascal,

        You are so funny!

        If what you say is happening was actually happening we would not be having this conversation.

        You talk as though the bubble has popped when it clearly has not.

        All we are seeing is a bit of froth being blown off the beer by the bubble blowers. They are still running the show.

        I bet you were rolling out the same stuff between 2007 and 2012 when house prices rose a bit and sagged a bit and then bit your lip for 5 years while they took off like Phar Lap.

        Get back to me when reality correlates with your imagination.

        I agree it will some day and the best sign of that will be an AUD that starts with a 4 not a 7.

      • Well put, people don’t realise how much the government has been doing to keep the bubble going, they’ve run out of bullets and we can’t avoid the gravity of the situation anymore.

    • McPaddyMEMBER

      Have always said that if there’s a way of managing this disaster that preserves the relative wealth of incumbents it will be taken. If the absolute wealth of the nation is left a smoking ruin, so be it.

  6. It’s nice that these guys have finally caught up with LVO and the readers of MB. They may be wrong about a soft landing though, which is a feat no bubble manager has ever achieved before.

    • In Australia we have had 3 soft landings in recent living memory. Why do you delude yourself?

      • BrentonMEMBER

        Short term debt cycle =/= Long term debt cycle.

        It is half a century of accumulated debt deleveraging that they need to manage a soft landing on.

      • Brent – agreed. But they only need to manage/face the long-term-unwind if they fail to trigger another short term upswing.

        I think that this is basically where we differ. I think that they will manage to conjure another round of magical appreciation. Others think that they are out of tricks.

      • I tend to agree with Peaches. Having watched the gubmint create a price floor in Spain by propping up zombies like Santander, I have absolutely no doubt that much the same will happen here. The gameplan is already written and neither party will have the balls to do otherwise – our foreign debtors WILL be kept whole. Those hoping to “vulch” inner ring detacheds at bargain prices will be sorely disappointed.

      • @jimbo: If you wanted a proper apartment/house in a city (the cities I watched being Zaragoza and Barcelona) the prices fell slowly for about 2 years and then hit immovable support as the bank bailout took effect and inventory was taken off the market. If you were unlucky enough to buy a post-80s dogbox in an undesirable area, then that’s something else.

        As I said, those MB readers hoping for huge falls to buy the inner-ring house of their dreams will be sorely disappointed.

        @treibs Address my point instead of inventing strawmen.

  7. “We do not expect hard landing”
    So all those negative geared investors will happily negative gear another couple of years without any equity growth?
    Good luck with that.
    “We see the unemployment rate as more likely to drift a little lower”
    Property price appreciation is the main ‘economy’ in town, and feeds more into jobs than these guys want to admit. So good luck with that too.

  8. As though Australia was independent of what happens internationally … as though.
    Coupla percent oughta do it …

  9. Melbourne isn’t a houses and holes economy. It’s a houses and houses economy. It seems that a downturn in housing is what would precede the lift in unemployment in that environment.

  10. So here is something to ponder. If the pattern of the past 10 years was running a 200K a year immigration program, allowing liar loans, IO loans, and extremely lose lending standards then what is going to happen when all of that easy lending is stripped away? Massive population growth and no easy money = ????

    • The same as happened in the UK in the late 80’s/early 90’s – rents soared and property prices fell, and fell, and fell….
      People were trapped in their properties and if they wanted to move, and couldn’t sell , they had to rent-to-move.
      Once one house in one street sells for X% lower than the rest, ALL houses get re-rated for mortgage purposes. It’s a dog chasing its own tail until it collapses from exhaustion. And that – and a property ‘readjustment’ are not fun things to watch….

      • How do you rate the chances of that eventuating here? If I had to hazard a guess, we would have all sorts of lobby groups trying to prevent this scenario. Most notably, the real-estate and finance sectors. Easy money for life?

      • Yuki… good question. It’s the combined night of all those vested interests, versus the economic force of gravity. I think the vested interests will keep things from collapsing (maybe declining very slowly like now, but not collapsing) until something outside Aus causes a crisis. Then gravity wins.

      • Cyclone Ranger

        A night of vested interests? So the next Liberal party conference date then.

        ; )

      • Jumping jack flash

        Correct.

        So the solution is the US’ solution. Don’t sell. Banks don’t foreclose. Everyone ignores everything until (most of) the debt is repaid. We also can’t QE like they did. At least not without causing more, and bigger, problems.

        We’ll trot out the “reject the house price crash” dancers and all will breathe a sigh of relief.

        Then after the debt shrinks to more acceptable levels, interest rates can finally rise, and the bad LVRs are picked off. Slowly and carefully. Very, very slowly and carefully.

        Property prices simply cannot fall too much. The banks would be toast. And not just any toast, they’ll be the kind of toast that’s fallen upside down into the sandpit.

      • astrolinMEMBER

        Spot on Janet, it was severe in the UK in the late 80s, early 90s, in a large part due to Nigel Lawson’s and Margaret Thatcher’s reckless inflationary overheating of the economy necessitating steep rises in interest rates. I think though that due to strong global growth in the 90s the effects of that were dissipated as the decade wore on. I suspect we wont be as lucky with that international aspect when our own housing market confronts the same problems.

      • @ Janet:

        “and a property ‘readjustment’ are not fun things to watch…”

        A lynching would be a not-fun thing to watch. Yet watching trumps being the subject.

        Millions of Oz households have gone all-in on resi real estate. Few appreciate what a liquidity squeeze for a couple of years feels like, and how it crushes the souls of those in the vice – the little people with precarious incomes and the modest ambition of owning their own home.

        There are times to absent oneself from a particular asset class and grow elsewhere. The consumption asset resi land fits that bill.

        Don’t Buy Now!

  11. wasabinatorMEMBER

    House prices to fall further (*)

    * = without government intervention (**)
    ** = government has ALWAYS intervened

    • Another person living in the real world! Thank god that me and Pfh (and Reusa) are not alone here.

      • fitzroyMEMBER

        The spigot is open and prices are still falling. The only move that will support prices at this level is to change the foreign buyer rules. Cut the rates will cut the dollar. FHB is already going 100%, this is clawed from the future and the numbers are fading. The Bulls are in trouble Peach. Look at the auction clearances

      • mild colonial

        I thought if I there was one thing I had learnt on MacroBusiness it is that there are no foreign buyer rules. Definitely what I’ve learnt.

  12. rentsailorMEMBER

    I’m assuming CBA’s forecast of a soft landing includes no major international ” 2008 like event” happening.

    I hope a correction takes place. The growth from 2012 to 17 was insane in Syd and Mel. Seems a soft landing correction wouldn’t take their levels back to 2012?

    I’m sure big gov and their big bank big australia devotees have a few rabbits they will pull sequentially as the trends continue downward.

    Even a 40% correction in say Epping.. a 1.8mil 3x 1 brick and tile house.. Will still be “worth” a cool million. Interesting times ahead.

    • Of course nobody is factoring in another GFC.

      If it was predictable and widely expected….. Then it wouldn’t be a crisis! Institutions/govt’s would prepare and prevent.

    • I’m in Melb and it’s way overpriced
      Sydney will be pounded
      Those prices in outer Sydney are outrageous

      • This is where Melbourne is probably going, mate. Outrageous outer prices like Sydney.

      • fitzroyMEMBER

        Prices are way too high and are being dealt with accordingly at auction. The Bulls are in trouble.

      • wasabinatorMEMBER

        “Price soak” will spread out to the outer burbs in Melbourne a la Sydney. But it’s a national thing: prices might drift lower in these hideously overpriced centers but it will result in this price soak into 3rd, 4th, 5th tier cities. End game will be no property below $1mill Australia-wide.

      • The price soak effect has already happened – it reached Hobart some time in the last twelve months – we’re already in the end game.

      • Super Phoenix

        Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

  13. michael francis

    I know CBA don’t see rising unemployment as a factor which supports a crash but what about rising underemployment and wage falls.

    • Since swapping the joys of existing within one insane residential growth price market (Beijing) for another (near Melb) just over a year ago I have been experiencing the joys of legal employment in a cafe as part of my get to know Australia again process after being away for so long.

      Things are starting to get rather tight out there in cafeland, and from what we hear it isn’t just us in our region though some places are doing better than others of course. I did have someone new last week come in for lunch on a weekday and he straight up said while looking at the menu ‘I can’t spend a lot, I have a mortgage’.

      People are not spending on weekend brunches like they were a year ago, toasties are very popular, many more people are coming in for coffees only during meal times, and recently we have even noticed people substituting muffins for meals.

      • TailorTrashMEMBER

        ……….looks like the vibrant cafe scene is giving off bad vibrations ……always a good barometer of disposable income .
        …”muffins for meals “….that’s got to be up there with the Big Mac index as good economic indicator …..🙂

      • mild colonial

        The beloved Popcod report returns! Strangely enough even in my little hub of insulated wealth I think cafe life is stalling somewhat. I don’t think I’m just projecting my own cutbacks. I’ve also started to notice that cars look old. Aaand, today, I found out theres a local professional group of thieves. “Thats how they make their living.” So, ah, the bust I thought would hit elsewhere might not be so far away.

  14. Jumping jack flash

    “That is, the capacity for dwelling prices to inflate beyond growth in incomes, as has previously been the case, is far more limited in the absence of even lower interest rates. As interest rates cannot go much lower, at least not in a material sense, we are unlikely to see the sort of growth in dwelling prices over the next 30 years that we did in the previous 30.”

    Well the bank finally admits that debt and lower interest rates was the key enabler behind the ridiculous increase in property prices.

    The primary driver was of course greed, a lack of superannuation, a paltry government pension, and an “entitled” standard of living.

  15. MOAR IMMIGANTS! What’s the odds that the government will try to increase the rate of immigration?

    • Jumping jack flash

      You can bet your grandmother that will happen.
      They need to hide the deflation more than ever, and it has worked very well so far.

  16. harry petropoulosMEMBER

    I tend to agree that house prices will keep falling due to changes in lending from our banks……….has anyone considered out of cycle mortgage rate increases?????……….this will decimate property prices and I dare say a 1.5 million property in early 2017 will be worth $900,000 in 2020………….this is definitely a property crash!!!!
    There is still time to sell for the over leveraged investors for this year………but next year the bank defaults increase substantially
    I’m perplexed that economists still believe in a soft landing!!!!!!

  17. The hard landing will come during the next global crisis – then finito! Myself and many of my friends luckily bought about 10 yrs ago and they have all doubled down on debt, investment P, bigger better homes, cars while wife and I stayed modest and laughed at by the way. With all the luck these ppl had they are somehow still struggling to make payments during a boom and one has basically lost nearly everything. In a boom! When unemployment goes up and oil and rates well… as bad as it will be for all of us (ie unemployment) it needs to happen to kill the rent seeking parasites which are destroying our country and to finally let people buy a place to live again rather than speculate. We are strughling now, during the next gfc we will be dessimated. What a sorry outcome! I really hope liberals are holding the bag

    • as bad as it will be for all of us (ie unemployment) it needs to happen

      And there’s the rub. It WILL be bad for most of us on a relative basis. Someone posted on here a few weeks back that they were young when the ’87 Crash hit, and waited with glee for The Next One to come so they could take advantage of it. Their opportunity came courtesy of the GFC and that writer did…nothing! Because when it’s bad, it affects everyone and seeing The Bottom is not probable – there’s always more to go, until you look back later and then know where it was. The same thing will likely happen this time coming.

      • It scares me to think about it. It takes a real idiot to blow all their money during a once in a lifetime boom. This will be carnage if we downturn like the US and EU did in 08

  18. cowpongMEMBER

    Unless credit standards are materially loosened prices cannot appreciate. Even then borrowers need confidence which during a global shock will be non existent. It’ll be be a slow correction until the next global recession and then it’s all over.

  19. Core logic has just recorded Sydney 4% down YoY.

    And that is based on price at settlement i.e. sales 6 weeks ago in late March and early April. Plenty more negative news after that which will still be working its way through the pipeline.

    • Plus clearances and other leading indicators suggest further deterioration in sentiment over the last six weeks.

    • 5% down will be a test of people’s psychology. At this stage should hit that around EOFY. Market will then go quiet over winter.

      Will be interesting to see what happens in spring.

  20. Government intervention will be very tricky, given they can’t ackowledge house prices are falling without further spooking the market, and the most obvious ways to re-inflate (increase NOM; loosen credit) are political poison. Maybe if they’d gotten the Royal Commission out of the way a few years earlier but now it will be hard to avoid further tightening of credit.

    • Lenny Hayes for PMMEMBER

      Margin call by the bank ?.

      As a bank shareholder and depositor I would hope so.

  21. “We also expect the unemployment rate to gradually drift lower” – really?!! HA!