'NO FLOOR ON THE HORIZON': Morgan Stanley's Australian housing model points to further price declines ahead

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  • Australian home prices have fallen for nine months, largely reflecting declines in Sydney and Melbourne and ongoing weakness in Perth and Darwin.
  • Morgan Stanley’s forward-looking housing model suggests national price measures will continue to weaken into early 2019, at least.
  • The model also points to further weakness in building approvals, and as a consequence residential building activity.

Australian home prices have fallen for nine consecutive months, pulling back after a strong cyclical upswing that began in the second half of 2016.

Morgan Stanley doesn’t see that changing anytime soon based off the signals generated from its forward-looking housing model, known as MSHAUS for short.

It fell to yet another record-low in the June quarter, an outcome that suggests price weakness will extend into early 2019, at least.

“We find MSHAUS has dropped to a new low of -1.0, suggesting that the recent decline in prices will likely continue into the first quarter of 2019,” it says.

“All categories of the indicator remain at weak levels, but credit supply was once again the main driver of the fall, as regulatory scrutiny continues to tighten amidst the ongoing Royal Commission into Financial Services and legal challenges to responsible lending practices.”

Pointing to recent housing finance and credit growth, Morgan Stanley says “the rationing of interest-only mortgages continues to bite… reflecting a combination of tighter lending standards and a deteriorating returns outlook”.

It also says strong supply of new housing is also pointing to further downside for prices when plugged into its model.

Even though APRA, Australia’s banking regulator, suggests the tightening in lending standards is now largely complete, combined with a strong pipeline of supply, Morgan Stanley says there’s no floor for prices on the horizon as yet.

Morgan Stanley

“National and Sydney dwelling prices are down about 2.3% and 4.8% from their peak, respectively, and auction clearance rates are tracking around 50%,” it says.

“At this stage, we remain of the view that a price adjustment will be [around] 10%, while noting that deeper falls would bring a monetary or prudential policy adjustment into the debate.”

Along with further weakness in national price measures, and despite a strong pipeline of new supply based off leading construction indicators, Morgan Stanley says its model points to the likelihood that building approvals, after a steep decline in May, will also weaken further.

“Our MSHAUS indicator has historically provided a good three quarter lead on building approvals, although we believe the increased availability of multi-dwelling permits is holding approvals above the levels that are likely to be financed and built,” it says, pointing the chart below revealing the chasm that has opened up between its model and official building approvals data released by the ABS.

Morgan Stanley

Compared to prior periods, the gap is unusually large. However, Morgan Stanley doesn’t expect that will last.

“While total approvals have proven resilient over the year, holding 217,000 per annum in May 2018 in trend terms, we expect construction activity to continue declining, particularly in the apartment segment,” it says.

“This would reflect some projects being shelved, given tighter credit conditions.”

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