Westpac says Australian home prices will fall for an 'extended period'

Martin Steinthaler / Hoch Zwei / Getty ImagesTwo years, says Westpac.
  • Westpac joins growing list of analysts forecasting an “extended period of falling house prices”.
  • Low rental yields and prospective tax changes over negative gearing and capital gains also killing investor demand
  • Will likely weigh on household spending, keeping GDP growth and inflation soft and official interest rates on hold.

There’s no shortage of analysts out there forecasting further weakness in Australian house prices ahead.

Indeed, AMP Capital, the Commonwealth Bank, HSBC, Morgan Stanley, UBS and Deutsche Bank are all predicting that recent declines will continue for some time yet.

And they’re the only forecasters we know of. There’s likely to be more.

Well, you can now add Westpac Bank to that list. It too sees prices continuing to slide over the next couple of years, led by weakness in Sydney and Melbourne.

“House prices are now falling,” it said in a note released on Wednesday.

“On a six month annualised basis, prices are now falling in Sydney (–7.3%), Melbourne (–1.2%), Perth (–0.4%) and Brisbane (–0.1%).

“We expect an extended period of falling house prices — up to 10% over the course of the next two years — with weakness particularly centred on the Sydney and Melbourne markets.”

Westpac says there’s not one but many factors that are likely to contribute to further weakness, including tighter lending standards.

“[APRA’s] macroprudential policies are restricting interest only loans and tighter guidelines for all new loans are slowing house prices and credit growth,” it says.

“In previous cycles the authorities have relied on raising interest rates to slow the highly cyclical housing market.

“This time, the same effect has been achieved by the regulator as banks have independently raised loan rates, foreign demand has slowed, and regulations have significantly squeezed the availability of credit.”

It says these headwinds for prices will continue for the foreseeable future as the supply of credit is expected to “tighten markedly”.

Along with slower growth in housing credit, Westpac says low rental yields and prospective tax changes over negative gearing and capital gains have also impacted investor demand.

Given the expectation of further weakness in prices, it says household spending could also slow, increasing the risk that Australian economic growth may underwhelm given it’s the largest part of the economy by some margin.

“This will represent a considerable change in the ‘atmospherics’ around housing wealth and may weigh further on prospects for consumer spending,” it says.

“While the wealth effect was modest in the period of rising house prices it is reasonable that there will be a more marked effect through the downswing.”

As such, Westpac expects GDP growth and inflation will remain soft, seeing the RBA refrain from lifting interest rates until at least 2020.

“We are much more cautious than official forecasts [from the RBA and Treasury] on the consumer, residential construction and equipment investment,” it says.

“Our advice to customers throughout 2017 has been to expect Australia’s growth rate to likely be anchored below trend in both 2018 (2.7%) and slowing to 2.5% in 2019.

“The official cash rate will remain on hold in both 2018 and 2019.”

Australia’s trend growth rate is deemed by many to sit between 2.75% to 3%. Both the RBA and Australian Treasury are forecasting that GDP growth will accelerate to an above-trend level this year and next.

NOW READ: New research shows the top end is hurting the most in Australia’s property downturn

SEE ALSO: RBA’s Ian Harper says if rates need to rise, ‘who cares what’s happening to house prices’

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