There’s been a lot of negativity surrounding the Australian housing market in the past month. More than at any point since the global financial crisis.
In recent weeks, there’s been no shortage of detractors queuing up to have their say. Every new critic is more bearish than the last.
Credit Suisse talked of ‘sharply deteriorating housing conditions’. It even went so far as to suggest the property market was riskier than stocks.
Morgan Stanley held the view that the market was ‘operating at peak’. Not only that, but it suggested housing was adding to risks of recession.
And last week Macquarie predicted house prices falling by 7.5% from March next year.
All in all, it’s a sobering assessment of the Australian housing market from the banks. But they have good reason to worry, with housing data appearing to support this negative outlook.
The Domain House Price report released this week was the latest to pour oil onto the fire. The report suggested that Sydney’s price boom was done for. Median house prices in Sydney slowed to 3.2% in the third quarter. That was down on the 7.7% rate of growth it recorded during the second quarter.
The overwhelming consensus then is that market conditions are deteriorating. And we can’t blame the markets for coming to that conclusion. Just don’t tell that to analysts at Deutsche Bank…
Deutsche Bank did a complete 180 on the bearish narrative today. In its view, the housing market presents a picture of health. It sees no peak for the market — far from it. The bank insists that the construction cycle remains below peak levels.
It reckons that construction needs to pick up another 20% to reach historic peaks. And until that takes place, any major house price decline is unlikely.
But is any of that really true?
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The gradual decline of Aussie house prices
Over the weekend, Sydney auction clearance rates fell to 67%. Which was down on the 72% recorded this time last year. Not that Deutsche Bank sees any cause for concern.
It reckons that while it suggests a price slowdown, it doesn’t guarantee a price collapse. Maybe so, but clearance rates are at year-long lows. Some kind of decline is taking place, however gradual it may be.
And it’s not as if house prices need to fall off a cliff overnight. The housing markets in Sydney and Melbourne are robust. Enough to manage any price decline gradually. But it’s still declining, which is what matters. And there’s no sugarcoating that.
What makes Deutsche Bank so sure the market is a ways off peak levels anyway?
It bases its argument on historical reference points more than anything. It reckons that sharp falls in Aussie house prices are uncommon. And that when adjustments take place, prices typically move sideways. Which is another way of saying that prices don’t swing wildly.
From the Sydney Morning Herald:
‘We are not certain why this time should be different. It’s true that debt levels are very high compared to history, but the interest burden isn’t.’
In other words, households can keep up with interest payments.
Well that’s a relief. Especially in an environment when rates have never been lower.
But what happens when they start rising from record lows? Something we’re likely to see in the next 18 months. That burden will weigh on households that little bit more. There’s no doubt we’ll see an uptick in loan defaults as a result of this too.
Rental growth declines
Low rental affordability is another sign that we haven’t reached peak housing yet. Deutsche Bank reckons this suggests the market can sustain more supply.
Except that rental yields are falling. So much so that rents grew at the slowest pace since 1995 this year. Across the nation, rental yields were up a mere 0.5% this past year.
In Sydney, rents grew at 1.9% in the year to September. Melbourne’s inched above 2.1%. Outside of Canberra, no other city recorded growth over 1%. In Perth, rents actually declined 5.8% during this period.
More telling though is the rate of growth during the third quarter, just past. It’s worth looking at this because the housing market decline is a recent phenomenon.
Prior to August, there wasn’t an awful lot of pessimism surrounding the market. Not nearly as much as there is today. And remember, August was the month that slowing investor lending really started showing up in figures.
What do we see when we look at rental yields in the quarter to September? That things look a lot less rosy than Deutsche Bank suggest.
Rents in Sydney actually declined by 0.2% for the quarter. Same story in Melbourne. Rental growth was down 0.3% during the quarter. Yields in Darwin and Perth declined by over 2% each. The combined rate of growth was -0.7% for the quarter.
Rents are slowing because population growth is too. As is the effect of low mortgage rates on the rental market. Coupled with a housing oversupply in key markets, it’s providing little incentive to push yields higher.
If rental yields continue on this path, affordability won’t be such a problem. And it would put into question just how much supply the housing market can stomach.
It’s better to think of Deutsche’s bullishness then as a counterweight to market pessimism. Even if it’s right, it position reflects a snapshot in time. The overwhelming evidence suggests that property prices are on the wane. Were it not for a perky Melbourne market, the outlook would be even gloomier.
How you see the housing market panning out from here probably depends on whether you own property. Every homeowner seeks assurances over price stability. That’s natural. But it’s also misplaced to throw your eggs in the basket of a lone voice. You’d be better off heeding the words of the growing list of housing bears.
Contributor, Markets and Money
PS: House prices are slowing. Population growth is too. As is the pace of lending for both investor and owner occupiers. With household debts rising, and housing supply up, it all forms a very bleak outlook for the future of the market. Especially once you factor in the potential for rate hikes next year.
Investment banks are merely wising up to what we’ve been saying all year. Morgan Stanley believes the housing market could send the economy into recession.
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