- The ANZ Bank sees prices in Sydney and Melbourne falling 15% to 20% peak-to-trough.
- It does not expect the RBA will cut official interest rates to support property prices.
- It expects property prices will stabilise by early 2020, allowing the RBA to begin normalising policy settings by August 2020.
ANZ Bank has abandoned its call for the Reserve Bank of Australia (RBA) to begin lifting official interest rates next year, driven by an expectation that Australia’s housing market downturn will now be longer and larger than previously thought.
“We have revised our housing price forecasts. Sydney and Melbourne, in particular, have been downgraded,” says Daniel Gradwell and Joanne Masters, senior members of ANZ’s Australian economics team.
“The fall in Sydney housing prices is already the largest in many years. Prices are now 9% below the June 2017 peak, a larger correction than in 2010-11, 2008, 2004-05, 1994-95 and, by the end of this month, the fall will be larger than the 9% fall in 1988–91.
“We think there is further to go.
“We now expect housing prices in Sydney and Melbourne to fall around 15–20% from peak to trough.”
While they admit the downgrade largely reflects an expectation that the declines in Sydney and Melbourne will be larger than previously thought, Gradwell and Masters say there will be some spillover “to Canberra, Brisbane and Adelaide”.
“However, we do not expect price falls in these cities to be as significant as in Sydney and Melbourne because they don’t have the same concerns around highly leveraged borrowers and a lack of affordability,” they say.
“While the Perth and Darwin markets are expected to remain weak, this is based on the ongoing adjustment away from the mining boom, rather than issues around credit tightening.”
Like many other forecasters before them, Gradwell and Masters say there are many factors behind the downward revision to their forecasts.
“This outlook is based primarily on ongoing credit tightening, while additional downside risks are possible changes to negative gearing and the eventual arrival of higher interest rates, whether from higher funding costs or RBA rate hikes,” they say.
Unlike previous downturns in the housing market, ANZ doesn’t see the RBA cutting official interest rates in order to support prices.
“Unique to this cycle is the likelihood that there may not be rate cuts to trigger a rebound in housing prices,” Gradwell and Masters say.
They also say there’s a high degree of uncertainty behind their call given the uniqueness of the current downturn in the market, being driven by factors other than interest rate hikes from the RBA.
“It is difficult to ascertain for how long banks will continue to implement further credit tightening, or if further tightening will flow from the Royal Commission’s final report,” Gradwell and Masters say.
“Also, next year’s federal election could see a change of government and adjustments to negative gearing and capital gains tax breaks.”
Given the heightened level of uncertainty, and the fact that home prices are already under pressure creating potential risks to the broader economy, ANZ has pushed back the expected timing of when the RBA will begin to normalise policy settings, suggesting it “will not hike rates while housing prices are falling”.
“Although households and the economy more broadly have absorbed falling housing prices quite well, we think the RBA will be cautious about adding to the downside risks by tightening while housing prices are under a reasonable degree of downward pressure,” Gradwell and Masters say.
“As a result, we now expect that the RBA will hike rates in August 2020 as evidence accumulates that the downturn in housing is coming to an end.”
ANZ expects housing prices will enter a “broadly stable pattern by early 2020”, allowing the RBA to begin to slowly lift official interest rates. Gradwell and Masters say the RBA could lift interest rates earlier than they expect should housing prices stabilise sooner than anticipated.