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.

The likelihood of a substantial housing surplus continuing despite a decline in construction.

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.

David Llewellyn-Smith
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    • Understand that u like bond market, stock market etc calls, banks are reluctant to incite fear on housing at it affects ordinary people. So when they are trying to get a message across in residential housing a 10% call is their way of saying it’s going to be bad without insulting panick.The fact they are saying 15% is now they are trying to hammer it home.

    • They keep updating the outlooks though. It’s a “boiling the frog” style message. Softly, softly, BOOM!

    • ““We now see a 10-15 per cent peak to trough decline in real house prices ”

      CPI is 2.1% and Sydney is already down more than 6.5% peak to trough according to corelogic, so in Sydney’s case that’s pretty much saying it could be over within two months.
      Actually, although Melbourne started falling later, it’s been falling faster for a little while now, so it’s pretty much the same for Melbourne.

    • Correct. If for example, ACTU get their way with wage rises then we’ll have 80s style wage inflation, nominal house prices to the moon, and savers copping a pineapple suppository.

      • Only if ACTU get their way AND immigration is cut, and the former has about as much chance as me (non-celibate Atheist lapsed Protestant background) becoming Pope.

      • @Rob, that was just one example. If it is a global shock then Central Banks could coordinate a global currency depreciation. There could be mandated wage rises, debt jubilees, etc. And if that doesn’t occur then we could have bank bail-ins. There are still many ways savers could cop a pineapple.

      • The powerful will get their wage hikes as per the 80’s. Public servants, Waterside unions, Teachers, etc etc etc. On the other hand the lawyers, company execs et al will all go after inflationary compensation and then some. We’ll have stagflation as per Freddy. Everyone else gets it in the neck (just being polite)

  1. I honestly think 40% nominal is more realistic. I think if it only turns out to be 30% it will mean they have re-ignited the bubble. And I don’t think that’s possible.

    I do agree though that there will essentially be a bull trap where everyone thinks that the worst is over and it’s back to onwards and upwards.

      • Listening to the Banking Royal Commission this morning, it was obvious that the banks have no intention of changing their ways. It was all “oops, we will do better in the future” which was pretty obviously bullsh!t to the adjudicator and viewer (me)

        Right now the banks are sitting on a tonne of money because the RC has made them be a tiny bit more responsible. Once the RC is over it will be back to the usual level of banking b*stardry with the full support of the government to keep the housing ponzi going.

  2. DefinitelyNotTheHorribleScottMorrisonPM

    If you had read “the plan”, you wouldn’t believe in 30% price falls. Just ask Steve Keen.

  3. We’re already well past 15%
    A friend of mine is looking to pay out his ex – had the house valued at $3.2m six months ago – yesterday’s valuation $2.5m
    The bank had pre-approved a $1.8m mortgage – now $1.1m – he’s 57yo
    That’s a 22% decline – and it’s REAL

    • Agreed. When volumes decline the bid-offer spread in any asset widens dramatically. A valuation is irrelevant — what matters is that someone puts hard cash on the table. A neighbour of mine bought a property for $1.75m in 2007, tried to sell it early 2012 and got a bid for $700k at auction. Took him another 5 yrs to sell and he spent a sh!tload of money on it. That’s illiquidity for you.

    • Hi Stomer, what area is you mate’s house? I’m seeing evidence of these sorts of percentages on Sydney’s Upper North Shore. Not the really good stuff. Still buyers for that but any even marginal is getting rogered. Local real estate agent at a friends b’day party two weeks ago even remarked that, “it’s a complete f’ing bubble. It’s going to be terrible”.

  4. Nope. 50% is baked in with new paradigm which is The Baby Boomer Mass Extinction which is well underway, and we all come to realise this amazing generation only really amazed themselves.

    The reality though is 80% is at risk. Compare the first and second graphs in this blog. Graph 1 is what the media wants people to think is normal – graph 2 is the reality of the size of our triple hyperbubble – the gape between the two lines is the full risk!

    • Jumping jack flash

      I don’t think many people realise how much debt there is, and that debt actually needs to be paid back, plus interest.
      We’re not the US, ffs!

      And yes, the risk.
      It can only be ignored for so long before people begin to ask “how about that risk?” and then its all over, incredibly quickly.

  5. ‘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.’
    then this: ‘With households 2x more leveraged to housing than back then, the impact on housing equity would be larger again.’
    …….what?? so there will be more destruction then a 1980’s hair band video

    Skydive naked From an aeroplane…..

  6. A 15% fall is magnified according to your leverage. Take the example of a 1 million dollar property with 300K deposit. The house is now down to 850K. You are now down 150K on your 300K deposit. Leverage is such a treat when things are going up and a horror show when it goes the other way. Ahhh… but leverage in property is good debt I am told …. yes, your broker no doubt told you that?

  7. 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.

    I’d say if we’re very lucky. This 10-15% business is bizarrely conservative, given the falls that have already happened, and what is going on in the world at the moment. As others have pointed out, given current results in SydMelb, calling the bottom at -10% is saying the bubble will resume before Christmas, which doesn’t seem likely to me.

    I just wish prices would fall in Canberra. 🙁

      • I’m the world’s most patient man, but this is trying my soul, mainly because I’m not young any more, and I’m not getting any younger. I hope to be able to own the roof over my head when I retire in a few years, rather than paying a mortgage or still renting after I stop work.

        Anyway, it is what it is. I’ll just have to go along with whatever thrills the ride provides, and hope it’s not one of those Dreamworld type of rides where you end up dead under the tangled wreckage.

      • LSWCHP – all the double income public service families in Canberra might mean that house prices remain sticky but I cannot see the prices holding up for the thousands of units and townhouses that are being slapped together out in the burbs. Last weekend I looked at a townhouse development at Molonglo, small units, cheaply built, crammed together, with the “best” of them overlooking a pond in the middle of nowhere, $500k and up, and the agent said they’d sold five just that morning (grain of salt). I would not touch them at any price but I would expect those are the sort of property that might drop by a half in the next couple of years.

    • You’ll need Govt to start slashing the public sector payroll. Here in QLD, meanwhile, Anastasia Palaszczuk has ‘created’ 27,500 new government jobs since taking office! She’s quite something our Anastasia — makes Jesus’s feeding of the 5,000 with loaves and fishes seem mundane by comparison.

      • 🙂
        It’s just amazing what is happening in Qld. It’s scary. It costs us $1000 a week now before we open the doors of the watehouse. How much will it be when the crunch comes and this lot not only can’t borrow, but have to pay back, money? $5000? $10,000? The possible scale of the crash is just monumental. Unfortunately I’m sitting in the middle of the road!

  8. Crash -15% … what does that mean – a rise of 15%. ? Two negatives, in this case the crash and the minus, make a positive.

  9. Having a conversation at the office over lunch, I was the only one expressing caution about future house prices. The majority view was prices only ever go up so while many on this site believe Armageddon is at the door, the message has not filtered through to any extent.

      • The average jub doesn’t get the connection between access to credit and house prices — they think house price rises are ‘magic’ or ‘destiny’.

      • I’m still hearing people who think house price rising is inevitable in Australia- something here makes us unique. They can’t quite explain what it is!
        And lm still hearing people saying it’s time to go into housing investment and development.lm not sure if that enthusiasm has outlasted trying to get a loan, but some of them are using their super l know.
        As various people say,this thinking needs to be really burnt and killed.

    • oswald, be a party pooper and ask them to explain how that works and when they say “it also has” butt in and say “that is not an explanation” and keep chipping away at all the bs…”supply & demand” etc, etc.

      If you’re not keen to socialise with your co-workers this’ll help you achieve that aim.

      • Tried that. I guess they have a few core beliefs in life, and like the sun always comes up in the morning, the fact that property prices always rise is one of them. It is unchallengeable! Takeaway from this – the average person simply exists, does not think.

      • Yeah, it’s really not worth it. When you start to talk about debt they think Public Debt as it’s the only thing really that the press ever talks about.

        When you start to mention Debt to GDP ratio, their eyes glaze over. When you start to talk about the property crash in the USA prior to the GFC they talk about jingle mail being the cause. When you talk about other housing bubbles and try to drill into causes and consequences the conversation is pretty much over. People just don’t have the attention span, intelligence, or both in general.

      • I’ve put forward my general view that a crash is coming. That investing in property and banks is not currently a good idea.
        When he time comes, I will simply say “called it!”. Or maybe a miracle will happen and I will be wrong.