- Morgan Stanley’s Australian housing model has fallen to fresh-record lows, pointing to further declines in prices and building approvals in the year ahead.
- It sees real, inflation adjusted home prices falling 15% to 20% from peak to trough with larger losses in Sydney and Melbourne.
- The bank is now monitoring incoming data flow for signs the housing downturn is spilling over into other non-housing areas of the economy.
- As things currently stand, it believes the risks are “tilted towards rate cuts in 2019”.
Morgan Stanley’s Australian housing model has fallen to fresh-record lows, pointing to the likelihood of further declines in prices and building approvals in the year ahead.
And that means the risks for the RBA cash rate are slanted to the downside, according to the bank.
“The strong completions data out this week completes the data set for our proprietary housing indicator, MSHAUS, which dropped again in the December quarter of 2018 to a low of -1.0,” Morgan Stanley says.
“This suggests the housing market weakness seen in 2018 is likely to continue through 2019, with both prices and approvals lower.”
The first chart from Morgan Stanley shows the MSHAUS overlaid against the year-ended change in Australian building approvals. The former has been advanced by three-quarters to demonstrate that it typically leads changes in approvals.
The second is a similar chart, only swapping out building approvals for real home price movements.
The bank is forecasting Australian home prices will fall by 15 to 20% in real, inflation adjusted terms, or 10 to 15% for actual nominal prices. It says that given the national downturn has been concentrated in Sydney and Melbourne, the price declines in these cities is “likely to be in excess of 20%, on average”.
The bank see further downward pressure on housing credit growth as “likely” in the period ahead, partially reflecting the timing of the final report from Australia’s Financial Services Royal Commission on February 1. It also notes that with the pipeline of new housing supply still strong, it will likely exceed demand over the coming quarters, further “weighing on prices” during this period.
Given its outlook for prices and approvals, Morgan Stanley says the only question now is whether the housing downturn will spillover into other non-housing areas of the economy.
“We are now watching second-round impacts closely. There is evidence of a consumer pullback over Christmas but a jobs impact will be key for any negative feedback loop to push Australia into a balance sheet recession,” it says.
“Along with weak data-flow since November, this also argues for a softening in the RBA outlook in a key meeting on February 5 along with its statement on monetary policy on February 8, with the balance of risks still tilted towards rate cuts in 2019.”
Financial markets are currently pricing a 50% chance that the RBA cash rate will be reduced to 1.25% by November this year. An increasing number of economists are also coming around to this view, including Capital Economics this week.
Based on public statements in late 2018, the RBA still retained the view that the next move in the cash rate was likely to be higher, although it saw no pressing need to begin tightening policy in the short-term.