The great uncertainty for Australia is no longer if the housing downturn will drag on the economy, but rather by how much

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  • Australian home prices fell by 4.8% last year, the largest annual decline since 2008.
  • In December alone, median capital city prices fell by 1.3% in average weighted terms, the largest percentage decline since 1983.
  • Morgan Stanley’s Australian equities strategy team expects more of the same in 2019, predicting further declines in prices and building approvals.
  • It says real, inflation-adjusted nationwide home prices could fall by between 10 to 15% from the previous cyclical peak.
  • The bank says that, in isolation, probably won’t be enough to see the RBA cut official interest rates. However, that could change if the current pace of price falls is sustained or accelerates.

Australian home prices fell by 4.8% last year, according to data from CoreLogic, the largest annual decline since 2008.

The downturn was particularly acute in the capital cities where median values fell by 6.1% over the year, largely driven by falls of 8.9% and 7.0% respectively in Sydney and Melbourne, Australia’s largest and most expensive housing markets.

In December alone, median values in these cities fell by 1.8% and 1.5% respectively, leaving nationwide capital city prices down by 1.3%, the largest one-month percentage decline since 1983.

In real, inflation adjusted terms, the current national price downturn is now the largest in percentage terms since the global financial crisis, and growing.

Morgan Stanley

It was a very weak end to what was a weak year for Australia’s most expensive housing markets.

Morgan Stanley’s Australian equities strategy team expects more of the same in 2019, a scenario that will leave the current downturn as the largest in decades, perhaps longer.

“Further details continue to suggest a sustained deterioration in conditions, with few signs of a turnaround,” it says.

“Auction clearance rates have fallen further and now sit at 40% nationally, while days on market and vendor discounting continue to worsen.

“A supply response has occurred and approvals are down 13% year-on-year, but this will take time to work through the pipeline and we expect an overbuild will continue through 2019.”

On the decision from APRA, Australia’s banking regulator, to remove restrictions on interest-only lending for some lenders at the start of this year, Morgan Stanley says this is unlikely to have a meaningful impact in preventing further price declines.

“We don’t expect this to noticeably ease tight credit supply, especially for the major banks,” it says.

The bank says that while some of the price weakness in December was seasonal, likely reflecting sellers lowering their price expectations in order to secure a sale before Christmas, especially at a time when demand was soft and listing levels were plentiful, it says the pace of price declines have clearly accelerated over the past few months, adding to uncertainty as to whether the downturn will drag on other parts of the Australian economy.

Morgan Stanley suggests it will. The only real question is by how much.

“We expect the wealth effects we have already seen on high value items [such as new car sales] to exert themselves on broader consumption spending over 2019, as households focus on deleveraging in an environment of declining asset prices, elevated debt levels and still low wage and income growth,” it says.

“However, the buffers of strong exports and government spending should provide some support to the economy and, as such, we see only a moderate negative impact on jobs and unemployment.”

Given the signals being generated by the bank’s forward-looking housing model, known as MSHAUS, both prices and building approvals are likely to fall further this year, pointing to the likelihood of a “10-15% peak to trough decline in national real house prices”.

Morgan Stanley

Despite the threat posed to other parts of the Australian economy, the banks says this, in isolation, won’t be enough to see the RBA shift to rate cuts as financial markets are now starting to price.

However, it says that could change if the current pace of price falls continues into autumn.

“The bear case remains a disorderly housing correction leading to a balance sheet recession,” it says. “A continuation of the rate of decline seen in December would be a signal we are shifting to this scenario.”

Later this week, markets will receive additional information on building approvals, housing construction and retail sales. Should they continue to soften, expect calls for a policy response from the RBA to grow even stronger.

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