ANZ says Australia's housing slowdown is almost over with prices set to rise again

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  • Australian capital city house prices rose by 0.8% in weighted terms over the past year, well below the double-digit gains in early 2017.
  • ANZ Bank says the worst of the slowdown is almost over with steady interest rates, strong employment growth and an acceleration in household income set to lift prices in the period ahead.
  • It suggests tougher lending restrictions could still be introduced by Australia’s banking regulator, APRA.

ANZ Bank remains confident that Australia’s housing market is on track for a “soft landing”, predicting that rather than heralding the start of a prolonged slump, prices will actually increase this year.

“We retain our view that prices will not materially decline,” say Daniel Gradwell and Joanne Masters, senior economists at ANZ. “A strong labour market and pickup in incomes will likely drive ongoing price growth.”

In addition to a pick-up in household income and ongoing strength in labour market conditions, Gradwell and Masters say another key factor underpinning their call is that the Reserve Bank of Australia (RBA) won’t lift official interest rates for at least the next year.

“We now do not expect the RBA will hike rates until mid-2019. The absence of higher rates this year will also support prices,” they say.

“High household debt leaves households sensitive to interest rate increases, although this seems unlikely to become an issue in this year.”

ANZ’s forecast for annual price growth nationally is shown in the chart below.

Source: ANZ Bank

Gradwell and Masters say the recent moderation, seeing average annual price growth across Australia’s capitals slow to just 0.8% from over 10% this time a year ago, is largely explained as APRA’s regulatory tightening, initially targeting investor borrowing before moving on to interest-only lending, acted to reduce demand and slow price growth.

However, even with reduced activity from investors, they say recent indicators don’t indicate any large degree of stress across the broader housing market.

Financial stability remains a medium term concern, although there are yet to be any notable signs of distress,” say Gradwell and Masters.

“Indeed, earlier macro-prudential measures have had the desired effect of slowing the housing market, and particularly the investor segment.”

However, given that macro-prudential tightening tends to fade over time, in their opinion, Gradwell and Masters suggest the risk of further restrictions from APRA cannot be ruled out should prices lift again.

“Given that credit growth continues to outstrip income growth, suggesting the household debt to income ratio will continue to rise from current record levels… which could bring financial stability back in to focus,” they say.

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