UBS says Australia's housing boom is 'officially over' - and that could have a big economic impact

Photo by Christian Petersen/Getty Images

Australian house price growth stalled in October, according to data from CoreLogic, thanks largely to a 0.5% decline in Sydney, the nation’s largest and priciest property market.

Prices in Australia’s largest city fell in the two months, leaving the decline since July at 0.6%, the largest over a comparable period since May 2016.

As a result of the weakness in Sydney, prices nationally have grown by just 0.3% since July in weighted terms, seeing the increase on a year earlier slow to 6.6%.

On the recent evidence, a Sydney-led national housing market slowdown is now underway.

Tim Lawless, Head of Research at CoreLogic, called it a “significant turn of events”, acknowledging that if historical patterns are repeated, there’s likely to be further declines to come.

He’s not alone on that front.

To George Tharenou, economist at UBS, the weakness in CoreLogic’s Home Value Index signals that Australia’s housing boom is now “officially over”.

“Australia’s world record housing boom is ‘officially’ over after a large ‘upswing’ of 6556% price growth in 55 years,” he says.

“After dwelling price growth was resilient at a booming 10% [plus annual] pace earlier this year, there is now a persistent and sharp slowdown unfolding.

“Indeed, the weakness in auction clearing rates, and the near flat growth in prices in the last 5 months, suggest the cooling may be happening a bit more quickly than even we expected.”

If the chart below from UBS is anything to go by, the decline in auction clearance rates in recent months points to the likelihood that annual price nationally will continue to decelerate into early 2018.

Source: UBS

“Price growth now seems likely to end 2017 around 5% year-on-year, below our expectation for 7%,” Tharenou says.

Like Lawless at CoreLogic, he says the Sydney-led slowdown is a lagged response to macroprudential tightening from Australia’s banking regulator, APRA, something that has led to out-of-cycle mortgage rate hikes as a result of tougher lending standards.

“This slowdown in house prices has coincided with a sharp slowing of investor housing credit growth to a 5.5% annualised pace in the last three months to September,” Tharenou says.

“This suggests a tightening of financial conditions is unfolding, which we expect to weigh on consumption growth ahead via a fading household wealth effect.”

Source: UBS

Given his expectation that weaker house price growth will soften household consumption, the largest part of the Australian economy, Tharenou says it will prevent the Reserve Bank of Australia from lifting interest rates until the second half of next year.

Should house price growth weaken further in the months ahead, it must surely cloud the outlook for residential construction, another crucial part of the Australian economy and the third-largest employer in the country.

With new home sales and building approvals both rolling over from the record levels reported last year, a bout of price weakness may exacerbate that slowdown, creating negative second-round effects across the broader economy given the sheer size of the residential construction sector.

NOW READ: Why trying to ‘fix’ Australia’s housing market could just create even more problems

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