- Australian home prices have been falling for the past six months.
- Deutsche Bank says real, inflation-adjusted home prices may not increase until late 2022 at the earliest.
- However, like most other forecasters, it is not expecting a significant price downturn in the period ahead.
Australian home prices have been falling for the past six months.
While the weakness is predominantly concentrated at the top end of the market, largely reflecting price declines in Sydney and Melbourne, there’s still a great deal of uncertainty as to whether that will extend into more affordable housing in the period ahead.
If the most expensive properties led the national price upswing, what’s not to say they won’t lead the next downsing, right?
There’s no shortage of analysts and economists out there who think that prices will continue to weaken in the next few years, with most expecting the weakness will be most acute in Sydney and Melbourne.
Potential lending restrictions based around debt-to-income and loan-to-income levels, along with tepid household income growth, high household indebtedness and ongoing affordability constraints, helps to underpin this increasingly common view.
Tim Baker, macro strategist at Deutsche Bank, is the latest analyst to wade into the debate.
He too thinks prices are likely to remain weak for quite some time, particularly if history is a guide.
“To form a view on the outlook, it’s first helpful to consider the historic experience, to see what can be learnt,” he said in a note released on Thursday.
Pointing to the chart below showing real, inflation-adjusted Australian home prices since 1980, Baker says that during previous housing cycles, downturns tend to last significantly longer than upswings, on average.
“The duration of the consolidation period following a boom tends to last longer than the duration of the boom. The consolidation period tends to entail modest falls in real prices. This gradual adjustment allows incomes to ‘catch up’,” he says.
“The recent boom went for four-and-a-half years, suggesting house prices aren’t likely to see any upside until at least late 2022.”
So, with history as a guide, it could be five years, maybe longer, until we see prices lift faster than inflation, allowing household incomes to catch up with prices after the recent spurt higher.
In his opinion, Baker thinks history will repeat.
However, like the vast majority of other forecasters, Baker believes the stagnation in prices is unlikely to lead to a crash, pointing out that while significantly smaller than in the past, Australia still has plenty of fiscal and monetary policy stimulus to deploy should prices really start to wobble.
“Australian policy authorities have the potential, and likely the will, to ease policy in the event of a serious house price correction,” he says.
“Australia certainly has less policy ammunition available now than in 2007, but still quite a lot compared to other countries.
“Government debt remains on the low side of G10 countries, while the policy rate is fairly high. And of course Australia never embarked on quantitative easing, leaving that tool in the back pocket if required at some point.”
Along with a potential policy backstop, should it be required, Baker says he’s also comforted by the view, in his opinion, that the price boom of years was underpinned by fundamental factors.
“One reason large price falls seem unlikely is that a good chunk of the boom seems based on fundamentals, rather than pure speculation,” he says.
“Undersupply seems to explain some of the high price of Australian housing.
“Last decade, robust demand from population growth met subdued supply as tight monetary policy weighed. This is still being worked through.”
This chart from Deutsche Bank shows Australian population growth overlaid against housing starts on a rolling annual basis dating back to 1970. The highlighted area shows that as Australia’s population boomed in the decade to 2015, housing starts remained around average levels until recent years.
Baker says another major factor working against a prospective price crash is that household balance sheets may not be as vulnerable as some others believe.
“Even with record debt, the interest burden is not particularly onerous [on borrowers], thanks to low interest rates,” he says.
“A common rejoinder is ‘but what happens to that when rates go up?’ Our response — that’s the very reason rates won’t go up much, if at all.”
Baker also says that households are also clearly focused on paying down debt, and getting ahead on their mortgage during this low interest rate era.
He adds that most of Australia’s housing leverage is mostly concentrated among wealthier households that can afford it. Along with financial assets such as deposits, superannuation and stocks, that suggests household vulnerabilities may not be all that extreme from a broad perspective.
“The household debt/income ratio looks very concerning, but a broader take on household finances is less worrisome,” he says.