Morgan Stanley says Australian home prices aren’t close to bottoming

  • Australian capital city home price falls have slowed in recent months, according to data from CoreLogic.
  • Morgan Stanley says that likely reflects seasonality, rather than the prospect that prices may soon bottom.
  • It still sees nationwide home prices falling 10% to 15% in real terms from the previous cyclical peak.

Australian capital city home prices fell by 1.3% on average in December, 1.1% in January and 0.9% in January, according to CoreLogic’s Home Value Index.

While that suggests the pace of price declines has slowed over the past two months, Morgan Stanley isn’t excited by recent deceleration, pointing out the slowdown likely reflects seasonality and does not mean that prices are close to bottoming.

“Price declines in February were less than the average decline over the past few months, but still faster than the average seen over the rest of 2018,” Morgan Stanley’s Australian Equity Strategy team says.

“This improvement is in line with the usual seasonal trends in house prices, with December and January typically significantly weaker.”

As seen in the chart below from Morgan Stanley, Australian home price movements tend to be seasonally weak around the turn of the New Year before recovering in March through to April.


“If the seasonal pattern holds, we can expect another improvement in price growth in March — typically the strongest month for price growth — even without an underlying improvement in the housing market,” Morgan Stanley says.

However, while seasonality may see capital city home price falls decelerate further in the coming month, from a fundamental perspective, the bank says recent trends in other housing-related data “still paints a challenging picture for the housing outlook”.

“While the RBA has pivoted to a neutral bias, conditions would need to deteriorate further for it to cut interest rates,” Morgan Stanley says.

“On top of this, credit conditions remain tight with housing credit growth continuing to slow as the decline in owner-occupier lending accelerates.

“Finally, while building approvals continue to drop at a rapid rate, completions should remain elevated over the year, even if it appears we are now past the peak in construction.”

Putting it all together, Morgan Stanley sees no need to change its view that Australian home prices will likely fall by between 10 to 15% in real, inflation adjusted terms, from the cyclical peak struck in late 2017.

“There are few signals of a near-term improvement,” it says.

“This suggests conditions in 2019 are likely to be similar to what we saw in 2018, although risks skew to the downside, especially given the apparently sharp slowing in the domestic economy in Q4.

“Nothing in the February data suggest a trough in prices is likely in 2019.”

According to CoreLogic, Australia’s median home price has now fallen 6.8% from its previous peak, or just over 8% when inflation is taken into consideration.