'Within months': Macquarie believes Australian house prices could increase far sooner than many think

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  • Australia’s housing market downturn, already one of the longest and largest on record, has slowed in recent months.
  • Median prices nationally fell 1% in January. In April, they declined 0.5%. It looks like they may fall around 0.4% in May, according to recent data.
  • Macquarie Bank says that over the past three decades, house prices began to increase five to seven months after the largest falls in the cycle occurred.
  • With history as a guide, Macquarie says prices “could rise by July”.
  • The prospect of RBA rate cuts and a modest relaxation in home loan lending standards, accompanied by the Coalition’s election victory, makes Macquarie more confident that history will once again repeat.

Australia’s housing market downturn, already one of the longest and largest on record, has slowed in recent months.

From a 1% slump in January, CoreLogic data showed prices nationally fell by a far smaller 0.5% in April. With just a few days left in the month, the group’s daily hendonic price series points to a likely decline of 0.4% for May.

The pace of price falls is clearly slowing, although there’s no sign of stabilisation just yet.

Macquarie Research

But Macquarie’s Australian equities strategy team don’t think it will remain that way for long, suggesting in a note released on Friday that prices could start to increase as soon as July this year.

“Australia’s house price growth reached its worst on an annualised basis in January. Prices have continued to fall since then, but the rate of decline has slowed,” strategists at the bank wrote.

“If you look at prior cycles, an increase in house prices occurred five to seven months after the trough in the annualised growth rate. Using the average of six months, prices could rise by July.”

As seen in the chart below from Macquarie, in every Australian house price cycle since 1989, whenever the monthly annualised price decline has bottomed, price growth has always followed within seven months.

Macquarie Research

Now we know what you’re saying: ‘Past performance is not indicative of future returns’, especially as the current downturn was not driven by official interest rate increases from the Reserve Bank of Australia (RBA), something that has typically driven price falls in the past, but rather the impact of tighter lending standards being rolled out by Australia’s banking regulator, APRA, since late 2014.

That alone means there’s clear grounds for scepticism.

However, Macquarie is not purely basing its assessment on what’s happened in the past, but rather what’s likely to to occur in the near-future.

Following statements from both the RBA and APRA last week that monetary policy and lending standards are likely to be loosened as soon as next month, those potential moves, accompanied by the recent election result that removed the threat of changes to the tax treatment on Australian housing, has made Macquarie more confident that history will repeat on this occasion.

“With the surprise Coalition election win, APRA’s policy change and an expected June RBA rate cut, we are more confident Australian house prices could rise within months,” strategists at the bank wrote.

“This should flow through to better growth in housing finance and building approvals.”

Last week alone, median home prices in Sydney and Melbourne increased by 0.3% and 0.1% respectively, according to CoreLogic data, a rarity compared to the broader trend seen now for well over a year.

Macquarie isn’t the only forecaster that’s become more confident about the housing market outlook in recent weeks.

In a note released last week, Citi upgraded its Australian home price forecasts, predicting the size of nationwide price falls this year will now be smaller than it previously thought

It also forecast that prices will not only stabilise but begin to increase on an annualised basis by the second half of next year.

Like Macquarie, Citi’s view is underpinned by the combination of expected RBA rates cuts and APRA easing, along with introduction of the government’s First Home Loan Deposit Scheme that it says will help support demand from first-home buyers.

Like Citi, AMP Capital has also become more optimistic, forecasting that home prices will now bottom earlier than previously thought.

“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,” said Shane Oliver, AMP Capital chief economist.

“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.”

While he expects the downturn will be smaller than previously thought, Oliver said the recovery in prices ahead 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.

Those forecasts tweaks followed similar moves from HSBC and ANZ Bank earlier this month with both forecasting that home prices will start to stabilise later this year or in early 2020.

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