Westpac discovers house price futureboom!

And the spruik just loves it:

Why not make it 100% by 2070? Via Bill Evans at Westpac:

Westpac expects mild (5%) dwelling price correction through to late 2021 to be followed by 15% surge over the next two years.

To date our view has been for a 10% fall in prices nationally from the peak in April 2020 through to June next year. From that point we expected increases of around 4% per annum over the following two years. The 10% near term fall was forecast to be distributed between Melbourne (–12%); Sydney (–10%); Brisbane (–8%); Perth (–4%) and Adelaide (–8%).

We now expect many capital city markets to be more resilient with a national fall of 5% between April and June next year, distributed between: Melbourne (–12%); Sydney (–5%); Brisbane (–2%); Perth (flat); and Adelaide (2%). Of most importance is that we are much more optimistic about the pace of price appreciation over the following two years with a total expected increase of around 15%.

For the near term, our revised view this means prices nationally are now only expected to fall a further 2.3% out to June next year (prices having already declined 2.7% since April).

We see the house price profile unfolding in four distinct stages.

The first, which has now largely passed, is the initial impact on prices from the collapse in economic activity in the June quarter.

That has seen broad based declines in Sydney (–2.6%); Brisbane (–0.9%); Perth (–2.6%); Adelaide (–0.1%) and a more severe fall in Melbourne (-4.6%).

However, the pace of deterioration outside of Melbourne has been milder than we expected back in March.

The second stage, which will cover the December and March quarters, will be a period of relatively stable prices, possibly with some modest increases, although Melbourne will be at least one quarter behind the other states and will still be experiencing falls in prices in the December quarter.

The third stage will see some limited resumption of downward pressure on prices through 2021, as we see an increase in ‘urgent’ or distressed sales relating to borrowers struggling or unable to resume mortgage repayments. Again, more adjustment is likely in Melbourne than the other cities.

The fourth phase will come once this selling pressure has worked through the system and prices lift again.

This recovery will be supported by sustained low rates, which are likely to be even lower than current levels; ongoing support from regulators; substantially improved affordability; sustained fiscal support from both federal and state governments; and a strengthening economic recovery (particularly once a vaccine becomes available, which we expect in 2021).

Why do we now see prices stabilising near term? There are two main factors behind our change in view:

1. A more substantial boost from lower interest rates, especially low fixed rates

Over the last 12 months the average discounted variable mortgage rate for owner occupier loans has declined from 4.25% to 3.65% (–60bps). Of special interest has been the fall in average 3–year fixed mortgage rate which, for owner occupier loans, has moved from 3.41% to 2.35% over the same period.

This is a record 130bps below the discounted variable rate and 190bps below the discounted variable rate a year ago – while the cash rate has only been lowered 75bps, the pick up for the marginal borrower is closer to 200bps if they now opt to fix.

Borrowers have been drawn to the lower fixed rates on the reasonable assumption that there is little to lose. Further significant reductions in the overnight cash rate, which traditionally impacts variable mortgage rates, are unlikely. The Reserve Bank of Australia (RBA) has identified the current 0.25% cash rate as the effective lower bound.

On the other hand, fixed rates may well go lower. The RBA indicated last week that it is prepared to further increase low cost funding to the banks by extending its Term Funding Facility (TFF), which offers 3 year loans to banks at 0.25%, from at least $152 billion by a further $57 billion. This facility could indeed grow to up $300 billion by mid–2021.

While banks may be expected to mainly use this facility to reduce funding costs – by replacing more expensive offshore funding, scaling back domestic retail deposits (some term deposit rates are still comfortably above 1%), or boosting their liquidity holdings as the Reserve Bank’s Committed Liquidity facility is wound back – there is also scope for cheap maturity– matched fixed rate mortgage funding. On that basis fixed rate mortgages could fall considerably further.

The RBA could also move to lower longer– term fixed rates by extending the duration of the TFF loans and/or targeting.

With such high exposure to the housing market in their portfolios, through both mortgages and small business loans, banks have indicated that they will look to manage these issues in an orderly fashion, minimising market disruptions and allowing a range of options including restructuring.

A patient strategy will also be supported by the stimulatory fiscal and monetary policy environment; and ongoing support from the regulator who is already showing patience in the way banks can account for their deferred interest loans.

Theoretically, investors (around 35% of total housing loans) might be more vulnerable but recall the extremely low funding costs which in most Australian markets are below rental yields.

With positive cash flow these loans should make borrowers less vulnerable to financial stress.

This process is expected to be at its most active in the June and September quarters next year although further extensions are likely.

One specific group of investors that may experience considerable additional pressure are those impacted by the collapse in net migration due to the closure of the international borders.

The Commonwealth government forecasts a reduction in net migration in 2020/21 from 232,000 in 2018/19 to 31,000 in 2020/21.

This shock can be expected to have its major effect on the rental market in the high– rise parts of Sydney and Melbourne which typically attract students and other temporary migrants. Around 70% of Australia’s net migration inflow is now from temporary visa holders, the overwhelming majority of whom are renters rather than owners. Furthermore, industry reports point to significant further supply coming on to these high–rise market.

This discussion of the third phase concentrates on the impact of a lift in supply from distressed sellers. However there will be some offset from demand conditions, which will still be strong, supported by record low interest rates; policy stimulus and a recovering economy.

Phase 4: sustained upswing

In the fourth phase, which we expect will continue for at least two years, prices are likely to be responding to the ongoing strong liquidity in the system; record low rates and freely available credit.

Unlike other cycles, the authorities – both fiscal and monetary – will be focussed on lifting the economic growth rate by targeting falls in the unemployment rate. That task is likely to be difficult and ongoing since we expect the unemployment rate to hold above 7% through to 2023.

In addition, the Reserve Bank will be also be focussed on lifting chronically low wages growth and inflation.

Concerns around excessive increases in dwelling prices; the need to limit credit supply; or the size of budget deficits which have dominated the pre COVID policy debate will continue to be superseded by the drive for labour market and inflation targets in 2021–23.

This will be a very constructive environment for dwelling prices.

Aside from ongoing support from policy, housing markets will also be buoyed by a strengthening economic recovery, slowly improving labour markets, the resumption of migration inflows and potential shortages of new stock.

We expect price increases over that 2021–23 period of 15% – around 7.5% per year.

These increases are likely to be distributed as: Sydney (14%); Melbourne (12%); Brisbane (20%); Perth (18%); and Adelaide (10%).

On the basis of those increases we would see affordability modestly worse than long run averages for the nation as a whole, with the advantage enjoyed by the smaller states diminishing.

Readers might see that estimate as optimistic but there are some risks to the upside.

Including the 5% fall we expect out to mid–2021, this would see a cumulative increase in prices of 10% from pre COVID highs over a three–year period where interest rates and credit supply are likely to be at maximum levels of stimulus.

Those upside risks are based on the psychology of markets.

If participants are convinced about our views on the likely favourable conditions in the fourth stage of the cycle they may choose to boost demand earlier than we currently expect providing an even more robust defence against the headwinds we envisage in stages two and three.

Summary: the full cycle

To recap, we see four distinct phases of the housing outlook.

1. Price falls in response to the initial COVID shock – which, apart from Melbourne, are largely behind us.

2. Relatively stable prices in the December and March quarters, with gains possible in some markets although Melbourne will still be experiencing falls in the December quarter.

3. A minor softening in prices through the June and September quarters in 2021 as lenders gradually ease back loan deferrals while seeking to avoid significant market disturbance. These efforts will be supported by ultra–easy monetary and fiscal policy; regulatory support; and ongoing economic growth.

Nevertheless, there will be ‘pockets’ of weakness associated with inner–city high– rise markets in Sydney and Melbourne and those overstretched borrowers who will be exposed by the failure of their underlying businesses.

4. The fourth phase will span at least two years when distressed loans from deferrals have worked through the system – and prices react strongly to ongoing low rates; improved affordability; a strengthening economic recovery and policy stimulus. Dwelling prices are expected to lift by 15% over this two–year period.

I have highlighted the ONLY line that matters in this argument. To be honest, I could shorten that to the phrase “the resumption of migration inflows”. There is no property rebound coming in Sydney or Melbourne before that. Quite the opposite. Prices will fall as rents are eviscerated and investors bolt.

Other capitals look better but they are about to get shocked by the fiscal cliff too. And why is nobody taking account of rates being at rock bottom, with the RBA put dead, so leveraging up has a new risk. In fact, Bill Evans has glossed over an entire suite of risks:

  • trouble with the vaccine rollout (guaranteed);
  • therefore slow border openings;
  • difficulty lifting immigration owing to high unemployment, virus and China decoupling;
  • China decoupling;
  • ongoing income shock;
  • restructuring business as the fiscal cliff arrives leading to double-dip recession, and
  • stock market bubble burst.

I remain bearish on prices (most especially the SE capitals) and think next year’s troubles are being severely underestimated by an increasingly hysterical spruikfest.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


    • From now until forever
      Boom boom boom boom
      I wanna go boom boom
      Let’s specufest the night together
      Together in my room

      • The Mortgage bus is comin’ and everybody’s jumpin’
        Tarneit through to Dapto
        An interstate free disco,
        The concrete mixers are turnin’ and brickie’s arms are burnin’
        So if you like to party,
        Get on and move your body

        We like to party!

  1. “If participants are convinced about our views on the likely favourable conditions in the fourth stage of the cycle they may choose to boost demand earlier than we currently expect providing an even more robust defence against the headwinds we envisage in stages two and three.”
    Translation: If enough people believe our spruik it will become a self fulfilling prophecy

    • Absolutely! And I much prefer your translation using 13 words to their 47.
      Additionally, did you know that the average person can only process approx 13 words per sentence, this and many legal documents commonly contain 40-50!
      And then they say….we told you, didn’t you read it???

    • You lot missed another observation.

      “To be honest, I could shorten that to the phrase “the resumption of migration inflows””

      If DLS had only written his name properly, starting with a capital “S”….

  2. Potential shortages of new stock… is it collusion if they work with their biggest developers to allow them to control flow on to the market? I guess it’s not.

    • The issue is, once again, artificially low interest rates — it makes the ‘cost of carry’ that much lower that developers can afford to sit on land and/or property for a much longer time and engage in such practices. Frankly, I’m losing count of the number of negative impacts that low interest rates actually has, many of them social costs.

  3. The cornerstone of Australian RE prices is foreign buyers in Sydney and Melbourne.

    That cornerstone is firmly in place. It has remained in place throughout the covid circus. Chinese buyers are still buying at new record prices.

    It will continue to remain planted firmly because the federal and state governments know full well it’s crucial importance. Now, those Chinese buyers won’t even need to pay land tax on vacant residences in Victoria. The incentives are starting to appear now for these Chinese saviours. They set the prices in the two capitals and everything flows from there.. right out to woop woop.

    Low interest rates are the support for the rest of the Aussie idiots who are forced / enjoy to play along. And, they are going down with certainty.

    • happy valleyMEMBER

      +1 Yep, with Straya having the most accommodating money laundering regime in the world, the property industry PM and a vibrancy ponzi, the Chinese know that Straya has to be on their money parking list.

      And with the RBA happy clappies and economists like Bill loving financial repression (aka r.pe), NIRP is just around the corner to support the property ponzi and the property PM.

      • Chyna won’t be able to rescue us because they will have to rescue themselves. Internal drama brewing in the evil empire

        • Actually there’s an interesting development taking place in China right now and that is the money supply is growing at (or close) its slowest rate this century, while elsewhere in the West it’s on ‘mega boost’. Pure speculation, of course, but there may have been an internal recognition that their policies in the recent decade could be terminal for the economy and they’ve decided to dial it right back and try and spend the next few years ‘righting’ the imbalances. It won’t be easy and I reckon they’re still on a knife-edge, but continuing to monitor their money supply growth may shine additional light on this. They clearly have huge problems with bank balance sheets that will take ages to deal with but if they dig in they may be able to come out of this in decent shape (eventually). In the meanwhile, the free-wheeling, splash-the-cash days of the Chinese may be at an end for a long while. Certainly the purge on all these corrupt officials supports this thesis. Let’s see what transpires.

      • Supply is an issue in Eurobodalla. Go back 5 or 6 years allhomes.com.au were advertising about 1400 listings and now it is less than 560 for the shire. The cheapest blocks back then were forced sales at 50-60K now similar blocks are 140K. Localised issues such as the fires have reduced housing stock, increased building work, brought in insurance money and government investment but the surprising thing is the lift in prices and lack of supply of vacant blocks.

        I am not sure but looking at the Eurobodalla experience it is probably being replicated up and down the fire ravaged eastern seaboard.

      • Yes foreign buyers are thin on the ground but what Bill has in mind is a further reduction of home ownership and increase in investor ownership of Australian housing.

        The banks don’t care who owns our housing stock.

        • Arthur Schopenhauer

          Imagine the perversity of Superannuation Funds owning vast swathes of rental properties, as their tenants pay them 9% of earnings.

  4. Look at the property market in the USA post the GFC…. nothing happened overnight. It is like a slow motion train wreck.

    • Tiliqua scincoidesMEMBER

      It’s a very different world now though. QE only really started post-GFC and that is what resulted in the unprecedented asset price inflation. The Fed just printed a huge amount of money in response to COVID. Money supply is often overlooked by housing bears but it is a very important factor in determining prices. In Australia, if people can get cheap loans they will generally leverage them into housing. Money will be cheap for the foreseeable future and all that matters to a lot of folks is whether they can afford the weekly repayment. At current rates, many people can afford very large loans and are willing to commit to them (even if that’s not a great long term strategy). I think this will lead to more price rises in the coming years, especially when migration kicks off again.

      • Yep. FWIW the boom is on in Canberra. Suburb records being set every week, perfectly normal houses with nothing to recommend them going for over $1m. I’d say it’s driven by people borrowing $1m. The payment is only $4000 a month or so, P and I at current rates. It’s not even that much really. (No, I have not borrowed $1m.)

        • Tiliqua scincoidesMEMBER

          Canberra provides a good example of how this will play out elsewhere when things normalise. For young couples in PS jobs that are COVID proof a million dollar loan doesn’t seem like that big a deal. There is more upside for property prices yet.

          It will become more and more socially acceptable to have huge loans in the next few years. When all your friends are doing it and getting by just fine it will seem normal.

          • Totes BeWokeMEMBER

            Maybe, but in ten years you still owe $1m, you could have rented the same place for $200k less over that time, and the house hasn’t risen much.

            AND, you could have invested the difference elsewhere.

            Surely we’ve reached the end point.

        • House across the road from my hairdresser expected to go for $1.4-1.5M Actually went to $50k less than $2M. However, Senior people in APS are preparing for a horror budget in May (not this coming October one). Any State that escaped COVID is busy rebounding. Personally I can’t handle that load of debt, and conditions are becoming even more unpredictable, but it looks like certain areas of ACT, and SYD are in property boom times.

          • Tiliqua scincoidesMEMBER

            I think the budget will have a larger impact on ability to deliver programs than APS staffing levels so Canberra should be fine from that perspective.

        • innocent bystanderMEMBER

          yep. Perth too.
          … I can’t work out why the data reported here on MB isn’t reflecting what is happening on the ground.

        • $4000 P/week is someone on minimum wages entire wage. So assume you and partner are both on minimum wage. That’s 1 persons whole wage on 1 expense. To me it is a lot of money to put on a mortgage.

          When I rented in Sydney I paid about $2,600 P/month and I felt that was expensive and I was far from minimum wage.

          But maybe I’m far too conservative? Nah it’s everyone else that’s wrong. At least I keep telling myself that.

          • Display NameMEMBER

            My nephews in the PS in Canberra are absurdly well paid for what they do. And that is by their own admission, not much. They talk a language I do not understand. Joe’s an EL6 but acting as a WK4 and with the XYZ allowance he is getting $$$. So what is Joe doing ? Oh, same as before really…Why am I paying tax?

      • Yes, MS is definitely a factor but it tends to influence market-traded financial assets more than housing given that housing is not a generic product and notionally relies upon the number and eligibility of borrowers. Declining lending standards can contribute to increased loans, obviously, but restricted stock has an influence too and I think that’s what we’re seeing right now — that married with the lowest rates in history. If enough people believe that property is going higher that is all it would take — going need some forced selling and a material change in sentiment to rock this boat. 2021 should be when the action unfolds.

        • I think it would take A LOT of forced selling. The people selling in Canberra at the moment are quite likely in trouble, but they can pretty much name their price. Would need much, much more forced selling to overwhelm all the keen pre-approved buyers.

        • The biggest factor in the ACT is the belief that the APS protects incomes in this town. I have this conversation regularly and get the same response…. but we are protected here as the government always pays well….

          When you point out how property tanked when Howard cut the APS they look like you spoke another language.

          When you point out that the APS is now spread out across the other capitals with up to 30% of APS positions being in Sydney and Melbourne they look like you asked them to solve a 3rd order polynomial equation with only a match and a small bottle of sauce.

          When you point out the current government has a history of spending into the pockets of businesses and not APS, well, you quickly get told your just being very negative and Canberra has always been a good investment…

          There are close to 1500 empty apartments, in either the completed or nearing completion. a number of new projects starting up that will add close to another 1000. The developers are trickling them into the market and it seems only “out of towners” are buying them up. There is a building near me that has close to 100 apartments in it, been completed for over a year and still only ever has less than 20 apartments with lights on. The online real estate listing only ever have 1 or 2 apartments listed in there as for sale and 1 or 2 for rent.

          New estates out on the fringes of the north west Gungahlin that have struggled to sell. If you want to buy a block of land to build a house on there are plenty of locations available if you want to buy into poorly serviced tract housing.

          The truth is the real growth is in the established inner suburbs and the fringe around them, the developing areas, not so much.

          • Good colour. It will be interesting because during this crisis Govts have stood pat on any restructuring, redundancies etc. However, once things start to normalise, govt debt (both state and federal) is going to become an issue and budgets are going to be an issue going forward. It’s quite likely, given that tax revenues will be lower across the board that governments at all levels will be forced to implement budget cuts – certainly under the LNP but even a Labor govt. If not deficits could be pretty large. The LNP will be hoping that another property boom ensues to paper over some of the cracks because if not, what else have we got?

          • The Coalition may renew its hostility to the APS with Labor not being a threat for a good long time, owing to probably losing Victorian seats in the next election. Canberra property is still better than Melbourne property though, I don’t think the Coalition will gut the APS so badly as to send Canberra into a depression, which Melbourne is likely to be in.

          • I expect they will move more departments to Sydney and Melbourne to help restore the property prices there…. Will get more local votes and punish the ALP fanciers in the ACT….

            Would be hard for the ALP to argue against helping Sydney and Melbourne…..

  5. reusachtigeMEMBER

    LOLOLOL. Youse extremely unwell bears just have no ability whatsoever to see the housing boom. It’s sad. Even now when it’s more obvious than ever before that boom times are coming you still make sh1t up about reasons why it just can’t be so. But guess what, it always is so and no facts are needed to know that. None, it’s just boom times, get it??!!!

    • Charles MartinMEMBER

      “But guess what, it always is so and no facts are needed to know that”
      This is the most profound thing you have ever said.

      • reusachtigeMEMBER

        The problem with this blog is that it attracts the over-educated types and most people with too much education are failures. The ones on here focus too much on data instead of enjoying real life. They are the sort of people that have blow up dolls.

          • reusachtigeMEMBER

            Actually I’m looking forward to these evolving and may get myself one in the future. As much as I love real girls at the relations parties they can be a little temperamental sometimes and you never know what will be on or off the cards.

            With a real doll, once they truly are real life, you can program them to be exactly as you desire. I’d love to go to an advanced real doll relations party!

    • Would you know my name
      If I saw you with Bill Evans?

      Would it be the same
      If I saw you with Bill Evans?

      I must be strong and carry on
      ‘Cause I know I don’t belong here with Bill Evans

    • Rorke's DriftMEMBER

      Or Westpac senior execs need to off-load a swag of investment properties held personnally, before the shtf.

    • darklydrawlMEMBER

      Yeah, I think ol’ Bill might want to look out the back where they have solved their ‘non-performing’ loans problem by pretending they don’t exist. Get back to me in 12 months Bill and then let me know what you think.

  6. Display NameMEMBER

    I would add in the eventual end of the company insolvency moratorium. Could be a real hit to confidence. But then again trading insolvent could just be part of the new Australian business model like underpaying employees.

  7. So now, north, south, east, west … from the boardroom table, to the editor’s chair, to the cranks in the comments pages … we are unanimous in our view that immigration underpins Australia’s property prices at their current utterly ridiculous and socially ruinous levels. Amazing how fast a national conviction can change.

  8. Jim's Central Banking

    With rates at zero, Bill is probably right.

    Credit will continue to drive inflation in asset prices instead of real growth. Central banks doing average inflation targeting will increase the level of financialisation, leading to more fake deflation (deflation in things you don’t need, inflation in essentials). Unless credit becomes more expensive and governments and central banks back away from asset fluffing, lower immigration isn’t going to stop the hard asset pile in, it just slows it a little.

    Become a filthy hippy and live in a commune.

    • Jumping jack flash


      The ironic thing is that banks hold the trigger on house prices. If they want them to increase in price, then all they need to do is relax eligibility criteria for the correct amounts of debt to cause rises in house prices. This can be done by the banks themselves, or in response to RBA lowering interest rates, or via the government giving everyone additional money (borrowed from the banks, probably) to use to obtain more debt with.

      Its not like anyone can buy a house outright with savings any more.
      (Not counting “savings” that are a pile of someone else’s debt)

      Bill predicting house price rises when banks are responsible for providing the debt with which to buy them is like me predicting I’m going to eat lunch today because I packed it in my bag this morning.

  9. I had 3 houses on 1 January, and $3m in leverage on them. I sold one before the COVID crisis and got the second one off my books unconditional yesterday and the third, I live in. Now almost debt free and feeling a hell of a lot more relaxed… was fun ride but even if it’s not over yet, it’s so much more difficult to predict. Someone else can have that stress…

    I’m now using some of the capital to bring the one home I have up to full spec…

    Plenty of opportunities out there for those who are patient…

      • I’m long some silver and like the idea of platinum. Hasn’t broken out yet but the supply-demand outlook is interesting and don’t think it has the positioning issues of gold. Own a couple of SPX puts strike 3250 in case thing head south…

        Also long farmland (NZ) but that’s about it right now.

        Opportunities will come up. As always, key is patience.

  10. Banks, RBA, Govt along with the spruikers are all colluding to make the last big surge….they have woken up to the power of fools through the Robinhooders in the stock market and will use their power to drag these massive heard of lemmings into the same beliefs in property…high leverage and low loans the same scenario in stocks and platforms to enable them to do this in property are almost here…believe me, this will happen…be careful of the future robinhood property surge that is brewing….

  11. Jumping jack flash

    Well, considering it is fundamentally the banks’ rules on debt eligibility that determine whether house prices rise or fall, then if Supreme Banker Bill says they’re going to rise, then rise they shall!

    Are you finally going to start handing out the correct amounts of debt to make this happen, Bill?

  12. The part where the Commonwealth bank says quantitative easing is going to happen and the money printing presses are going to run hot for a long time –

    “On the other hand, fixed rates may well go lower. The RBA indicated last week that it is prepared to further increase low cost funding to the banks by extending its Term Funding Facility (TFF), which offers 3 year loans to banks at 0.25%, from at least $152 billion by a further $57 billion. This facility could indeed grow to up $300 billion by mid–2021.”