Morgan Stanley's Australian housing model says the current downturn will be the longest and largest since the 1980s

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  • Australian home prices have fallen for 12 consecutive months, with the pace of price declines accelerating in September.
  • Morgan Stanley’s forward-looking housing model, a more than useful indicator in predicting changes in home prices in the past, suggests the current pace of declines will likely extend well into next year, putting the downturn on track to become the largest since the early 1980s.
  • The model is forecasting national prices will fall between 10-15% in real terms peak to trough, largely reflecting that the downturn is likely to be longer than previously thought, rather than a disorderly decline in prices.

Australian home prices have fallen for 12 consecutive months, with the pace of price declines accelerating nationally in September, largely reflecting a steep drop in Melbourne and continued modest declines in Sydney.

Those themes have continued into early October, according updated figures from CoreLogic.

With median prices in Melbourne and Sydney down 4.4% and 4.1% respectively so far in 2018, it’s little surprise that Australian home prices have fallen 2.7% in average weighted terms despite mixed results in smaller markets.

These cities are home to 40% of all Australian homes, and account for 60% of the nations total housing wealth, after all.

And if you think the price declines will moderate from here, be prepared for disappointment.

According to Morgan Stanley’s forward-looking housing model, something that has been a more than useful indicator in predicting changes in home prices in the past, the current pace of declines will likely extend well into next year, putting the current downturn on track to become the largest since the early 1980s.

The model, known as MSHAUS, has fallen to the lowest level on record, pointing to the likelihood of a national price correction from peak to trough of between 10 to 15% in real, inflation adjusted terms.

Morgan Stanley

“We struggle to see improvement in any of our components over the next year, with pre-existing headwinds of net supply, an RBA on hold and sustained focus on lending standards, all independent of potential negative gearing/capital gains tax changes,” Morgan Stanley says.

“We now see a 10-15% peak to trough decline in real house prices, from 5-10% previously, which would mark the largest decline since the early 1980s.

“This downgrade largely reflects the downturn’s extended length, as we expect the relatively orderly declines to date will continue.”

So why is the model now pointing to even larger home price falls in the period ahead.

New housing supply, and a lot of it, in short.

“All housing market drivers remain a drag, but Supply-Demand Balance was the main driver of this quarter’s decline, adding to the drag in previous quarters from tightening credit supply,” Morgan Stanley says.

“The category measures the gap between completions and the net increase in households.

“On the supply-side, the run-up in construction from the East Coast apartment boom has continued longer than we expected, with completions around 215,000 annualised.

“On the demand side, net migration has fallen noticeably in the past few quarters, trimming our underlying demand estimate to around 175,000.”

So Australia’s record record building boom, largely reflecting a huge amount of new apartment supply predominantly in Sydney, Melbourne and Southeast Queensland, will, along with the likelihood that tighter lending restrictions remaining in place, act to place downward pressure on prices, according to the model.

Should the model prove to be correct, Morgan Stanley says it will not go unnoticed by households given the high, or in some cases extreme, exposure to property thanks to the boom in prices seen over recent decades.

With households two times more leveraged to housing than in the early 1980s, the impact on housing equity would be larger again.

As the largest asset held by a majority of Australian households, declines of the magnitude forecast would surely weigh on spending, acting to weaken what is the largest and most important part of the economy.

And if consumption weakens, it’s likely that GDP growth, employment, wages and inflation would also weaken in response.

Right now, household spending appears to be holding up despite the recent downturn, something that likely reflects that job market conditions remain strong.

If that too starts to soften, it would create a problem.

At this point, Morgan Stanley is not calling for the downturn to become anything more sinister than a large correction. However, it says the risk of a disorderly price decline cannot be completely ruled out.

“An acceleration of declines are in our bear case, and we will continue to monitor stress points, including arrears trends,” it says.

NOW READ: Home loan borrowers in the outer suburbs of Australia’s capital cities are vulnerable to an economic downturn

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