Australian Property Declines Could See Interest Rates Cut Further

The housing market has been dropping for well over a year now. And it seems like every week the forecast for Australian homes gets worse and worse.

And as we head further into the year, I don’t think the fall in house prices will ease up any time soon.

While some remain optimistic, it is hard to ignore the falls already seen, especially in Sydney and Melbourne.

And with the news coming out last week that the reserve bank may lower interest rates even further because of 20% falls predicted in Sydney and Melbourne, it’s even harder to be an optimist in this economic environment.

House prices could fall more than 20% in Australia’s two largest cities

While AMP and the ANZ have called it for a while now, Morgan Stanley estimate for house prices a 10% drop. But now they’ve doubled that to 20%.

According to The Urban Developer, the investment bank is blaming ‘tightening credit, deteriorating sentiment and a supply pipeline that is yet to respond to price weakness in the market for its revised outlook.’

So what do these declines now look like in the whole scheme of the Australian housing market?

Well, we’re looking at the biggest decline in the housing market since the early 1980s, according to Morgan Stanley.

The analysis reports that ‘National prices have now fallen 6.7 per cent from the peak in late 2017 (Sydney -11.1%), and with fundamentals weak, debt service rising and credit supply tightening, we see falls continuing into 2019’.

So if house prices are continuing to plummet, what does that mean for residential construction?

Well…it’s not great news.

BIS Oxford Economics (an economic forecaster) predicts that that biggest fall in residential building and the biggest housing correction since the GFC is still to come.

In fact, BIS forecast that there will be a 15% drop in residential construction in 2019–20.

And with approvals down 18.4%, according to ABS data, Morgan Stanley expects decline to continue:

We expect construction activity to continue declining, particularly in the apartment segment

This would reflect some projects being shelved, given tighter credit conditions.’

What this could mean for interest rates

If the housing downturn continues to year’s end, the RBA may be forced to lower rates to 1%.

According to AMP’s Shane Oliver, we could see two interest rate cuts happening in 2019, one in August and one in November, lowering the rate to 1%. This gives the RBA time to assess the situation post federal election and any tax cuts that may occur.

But it’s not only rates and house prices affected by the downturn. The Australian economy relies heavily on the housing market, so with a downturn as large as this, it doesn’t come as a surprise that that economic growth may also experience a fall.

As Oliver states:

The housing downturn will affect the broader economy via slowing dwelling construction, negative wealth effects on consumer spending (ie, our wealth goes down, we feel poorer, we spend less than otherwise) and if rising defaults drive a further slowing in bank lending.

The first two will detract 1 to 1.5 percentage points from economic growth. Growth in infrastructure spending and business investment should help keep the economy growing but its [sic] likely to be constrained to around 2.7% which in turn will keep wages and inflation low.’

Investors Also in for a shock

For investors, this isn’t the best news. As Oliver further explains:

Over the very long-term, residential property adjusted for costs has similar returns to Australian shares. So, there is a role for it in investors’ portfolios. However, right now the slump in property prices in some cities is bad news for investors given that rental yields are often just 1-2% after costs.’

This week in Markets & Money

In Monday’s Markets & Money, Vern looks at the future of the Chinese economy. Now, we all know that the US and China are currently sorting out trade negotiations, but Vern believes that whether China comes out the winner or not won’t matter. Either way, the country will hit a wall, as their economy is slowing down far too quickly. To find out more, go here.

In Tuesday’s Markets & Money, Selva discusses the current US government shutdown and what this could mean for their economy. As many workers are either stuck at home or working without pay, they are also putting off spending. And with the economy being affected by not only the wall debate but also the US–China trade talks happening right now. To find out more, go here.

On Wednesday, Selva looked at the biggest and most popular crypto, bitcoin. But instead of looking at how the crypto has been tracking, Selva assessed the pessimism surrounding the coin. Many have been waiting to see the currency die. But the crypto has survived many obstacles, and it doesn’t look like it’s ready to die yet. And the longer bitcoin survives, the longer the coin could last. To find out more, go here.

In Thursday’s Markets & Money, Selva does her own version of the 10-year challenge. But instead of a photo, she’s comparing the state of economies. According to Selva, the world doesn’t look all that different. We lost our faith in institutions, and that shows with the election of US President Donald Trump and the ‘leave’ vote for Brexit. And another crisis could be around the corner, as the global economy slows down and we have huge amounts of debts. To find out more, go here.

In Friday’s Markets & Money, Selva looks at the souring Australian property market. And while some not yet in the market may think this is the time to buy, tighter credit lending may actually make it tougher to crack into the market. And as construction slows and the property market continues to suffer a downturn, unemployment could rise. To find out more, go here.

Kind regards,

Alana Sumic,
Editor, Markets & Money

Markets & Money is unlike any other finance newsletter. Our mission is to look at the world of investments and finance in a sceptical and contrarian way. Our editorial team looks beyond the headlines and obvious explanations to bring you what we think is really moving the market. More importantly, we’re trying to show you where the next big opportunities and where the big risks are that you might not be aware of. In Markets & Money you’ll read about the state of the Australian housing market, the future of the commodity boom, China’s rise to an economic superpower, the fate of the US dollar, and of course a whole lot more.

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