Australia’s property sector is expecting much slower growth in housing construction and house prices across most markets in the coming year, highlighting the challenge that weaker growth from the housing market will present for the Australian economy in 2016.
That’s the downbeat assessment to come from the latest quarterly ANZ-Property Council survey with expectations for price growth and residential construction falling heavily during the quarter.
The table below, supplied by ANZ, reveals that despite overall property sector confidence hitting a one-year high in the March quarter, there were steep declines in expectations for house price growth and residential construction.
Cherelle Murphy and David Cannington, members of ANZ’s Australian economic team, suggest that the “devil is in the detail”, noting that “for now the sharp decline in housing market confidence is being offset by both a solid pipeline of planned work for property businesses in 2016 and an optimistic outlook for commercial property”.
The decline in housing market confidence is shown in the chart below. It fell to a three-year low during the quarter.
Despite the downbeat view on the residential sector, the pair described commercial property conditions as “patchy across markets and regions”, with the “outlook for capital growth and construction activity in retail and tourism property (improving), reflecting the positive impact of both a lower AUD and positive consumer confidence on business conditions in these sectors”.
According to Murphy and Cannington, the survey has implications for not only the property sector but the wider Australian economy.
“Not only will a softer outlook for housing construction likely provide little direct investment benefit to the economy, but weaker expectations for housing sales and price growth are also likely to weigh on housing services and real estate employment and household consumption via a reduced wealth effect,” they wrote.
The chart below reveals the relationship between the survey’s housing construction outlook index to dwelling approvals and housing starts.
Commenting on the survey’s findings, Murphy suggests that it “is consistent with our view that there will not be a significant downturn, but a more muted profile for housing construction and prices this year”.
Overall, the housing sector’s contribution to growth will ease through softer construction activity and a reduced ‘wealth effect’ on Australian households from weaker price growth. The recent ANZ-Property Council Survey results show that tighter regulation of investor mortgage lending and higher mortgage lending rates have weighed on housing market sentiment. This has also become evident in weaker mortgage lending data through the second half of 2015. Today’s survey data suggests that the property industry is bracing for higher interest rates and more prudent credit distribution by lenders.
ANZ suggest that the subdued housing market outlook will provide scope for further RBA interest rate cuts in 2016
“We expect that the Reserve Bank may provide some relief for the economy this year, through interest rate cuts, if other sectors do not pick up to compensate for the slower path of housing,” said Murphy.
ANZ is forecasting that the RBA will cut the cash rate twice in 2016, once in May and again in August. Most other analysts, including those from the other big four banks, currently forecast that the cash rate will remain unchanged at 2.0% throughout the course of 2016.