DOWNTURN NEARING ITS END: Citi expects Australian home prices will be rising by the end of next year

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  • Australian home prices have fallen 7.9% since peaking in September 2017. The falls in the capitals have been even larger over this period at 10.3%.
  • HSBC and ANZ believe national home prices will start to stabilise later this year or in early 2020.
  • Citi Research has gone one better, forecasting prices will be higher in annualised terms by the end of next year.
  • It’s forecast upgrade is underpinned by three factors: RBA rate cuts, a greater borrowing capacity among home buyers and increased first-home buyer demand.

Australian home prices have being falling since September 2017, losing a cumulative 7.9% in the process.

The decline in the capital cities has been even larger over the same period with median values down 10.3%, largely reflecting declines in Sydney and Melbourne, Australia’s largest and most expensive housing markets.

Many are now asking when property prices will bottom, especially as the current downturn is already one of the largest and longest on record?

Both HSBC and ANZ banks are forecasting that prices will start to stabilise later this year or in early 2020.

However, Josh Williamson, senior economist at Citi Research, has gone one better, forecasting that prices will not only stabilise but increase by the second half of next year.

“We’ve upgraded our house price forecasts,” Williamson said in a note released on Wednesday. “We now expect house prices to show year-on-year growth of 3.0% by December 2020.”

Previously, Citi was forecasting that national prices would be unchanged on an annualised basis by the end of next year.

Citi Research

Williamson said the modest upgrade reflects a combination of factors, most of which have arrived over the past week.

“Firstly, the high likelihood of interest rate cuts from the RBA beginning in June and our view of a follow-up cut in August. The cuts should be fully passed-on by a majority of the banks,” Williamson wrote.

In a speech earlier this week, RBA Governor Philip Lowe adopted an explicit easing bias on behalf of the central bank, providing a signal to markets that the bank was likely to cut Australia’s cash rate in the months ahead.

Financial markets currently put the odds of a 25 basis point decrease in the cash rate on June 4 — when the RBA next meets — at just over 90%.

A further follow-up cut of 25 basis points is also fully priced by November, a scenario that will see the cash rate fall to just 1%. Markets also deem a further reduction in the cash rate to 0.75% by the September quarter next year as an even-money bet.

So it looks like the RBA will be cutting rates, especially as Lowe didn’t push back about current market expectations earlier this week.

Along with lower borrowing costs for new and existing mortgagors, Williamson says APRA’s proposal to remove the minimum 7% serviceability rate that all new loan applicants are assessed on will also help to underpin market conditions.

“According to our bank analysts, this will result in a 10% increase in borrowing capacity, make credit available to owner-occupier borrowers that have previously been denied loans but also benefit investors,” he wrote.

Williamson also said the introduction of the government’s First Home Loan Deposit Scheme, announced by Prime Minister Scott Morrison prior to last weekend’s federal election, will also help to boost demand among first-time buyers.

“In combination, these changes should add to effective housing demand and moderate the peak to trough cycle in established house prices,” Williamson wrote.

“Our peak to trough year-on-year nominal house price change forecast has therefore been revised from a decline of 10% to 7.5% by June 2019.”

In the year to April, Australia’s median home price fell by 7.2%, according to data from CoreLogic.

Like Williamson, Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital, also expects home prices will bottom earlier than he previously expected given the recent news flow.

“The combination of the removal of the threat to property tax concessions, earlier interest rate cuts, financial help for first home buyers and APRA relaxing its 7% interest rate test points to house prices bottoming earlier and higher than we have been expecting,” Oliver said in a note released on Thursday.

“We now expect capital city average house prices to have a top to bottom fall of 12% — of which they have already done 10% — rather than 15% and to bottom later this year.”

However, similar to the view expressed by Citi, Oliver says any subsequent recovery in prices is likely to be modest compared to cycles in the past.

“Given still high house prices and poor affordability, still very high debt levels, tighter lending standards and rising unemployment a quick return to boom time conditions is most unlikely,” Oliver said.

NOW READ: Australia’s housing downturn is ‘probably past the worst’ but don’t expect a ‘V-shaped recovery’ in prices

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