Morgan Stanley: House prices to crash -15%

Via Morgan Stanley today which has cut its house price correction base case to -10-15%:

We struggle to see improvement in any of our components over the next year.

We now see a 10-15 per cent peak to trough decline in real house prices (from 5-10 per cent), which would mark the largest decline since the early 1980s.

With households 2x more leveraged to housing than back then, the impact on housing equity would be larger again.

This downgrade largely reflects the downturn’s extended length, as we expect the relatively orderly declines to date will continue.

However, an acceleration of declines are in our bear case, and we will continue to monitor stress points, including arrears trends.

Strong employment growth and temporary migration has helped contain reported vacancy rates thus far, but we see a sustained overbuild into 2019 weighing on rentals.

I agree with this based upon the local conditions of seven exogenous shocks:

• macroprudentials two and three;
• royal commission;
• bank rate hikes;
• oversupply and immigration cuts;
• election and negative gearing reform;
• withdrawing Chinese investors.

The RBA will cut into this of course and we’ll see a moment’s stability.

But the problem is we’re approaching the business end of the global business cycle and when the next global shock hits Aussie house prices will take another big leg down.

Another -15% is my best guess, in a very disorderly fashion, delivering a total correction of -30% nominal and -40% real.

If we’re lucky.