- Australian capital city home prices have been falling for six months, seeing annual growth turn negative for the first time since 2012.
- Morgan Stanley’s leading housing market indicator points to further “orderly” declines ahead.
- It says this will likely weigh on household spending, seeing economic growth decelerate and keep the RBA from lifting interest rates until the second half of 2019.
Australian capital city home prices have been falling for six months, seeing annual growth turn negative for the first time since 2012.
This indicator from Morgan Stanley suggests there’ll not only be further price weakness in the months ahead, but also the likelihood of renewed softening in building approvals. It says these two factors will likely weigh on household consumption and building activity, seeing Australian economic growth decelerate, rather than accelerate, this year.
It’s Morgan Stanley’s Australian housing model, known as MSHAUS for short. It uses a variety of metrics such as supply-demand balance, rental market conditions, mortgage serviceability, housing market accessibility, credit supply and house price expectations to predict what will happen to Australian dwelling prices in the period ahead.
The MSHAUS has been overlaid against annual changes in real Australian home prices with a three-month lead.
Right now, the indicator sits at the lowest level on record, pointing to the likelihood that prices will continue to fall this year.
“Our leading housing market indicator points to further declines in prices and activity over 2018,” Morgan Stanley says.
“Our central expectation is that this slowing is orderly, but we still expect this to continue weighing on sentiment and consumption through 2018 and 2019 as wealth effects partially reverse.”
This, the bank says, will create headwinds for household spending, the largest part of the Australian economy.
“The past few months have seen the jobs pulse slow markedly,” Morgan Stanley says.
“We see unemployment drifting higher to 5.8% in the first quarter of 2019 before falling gradually to 5.3% in the December quarter next year, delaying hopes of a wage recovery.
“Tighter credit and fading wealth effects should add to the grind for the consumer.”
And with the largest part of the economy hamstrung, it says this will likely see economic growth soften, at least temporarily.
“A stronger exports profile has seen us tweak our 2018 GDP growth up by 0.1 percentage points (ppts) to 2.1% annualised, but we continue to call for a deceleration, in contrast to consensus seeing a return to trend to 2.8%,” it says.
“More fiscal easing, a lower AUD and a lessened LNG capex drag should see growth recover to 2.7% annualised in 2019, allowing the RBA to begin hiking [interest rates in the second half of 2019].”
While Morgan Stanley is forecasting that the RBA will lift rate twice in late 2019, it says the risks to this view are for a later liftoff than currently anticipated.
“Our base case sees the RBA in a position to hike rates in the September quarter 2019 as higher import prices boost inflation and the labour market begins to improve, but a recovery in wages growth remains essential,” it says.
“Our bear case sees a sharper slowdown in housing leading to consumer retrenchment and balance sheet recession, prolonged and exacerbated by record Australian household record leverage.
“In this scenario, fiscal stimulus would be delivered, presenting a risk to the AAA sovereign rating, while the RBA cuts rates to 0.5%.”
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