Pessimism on Australian house prices looks factored in -- and that could be important if there's any more bad news

OLI SCARFF/AFP/Getty ImagesFalling Australian home prices, as certain as death and taxes.
  • Australian home prices have been falling for over a year, led by steep falls in Sydney and Melbourne.
  • Clients of UBS remain “bearish” on the outlook for prices in the year ahead, indicating a national decline of around 7% is expected.
  • If so much pessimism is already factored in, it means households may have already adjusted for this outlook. Sentiment towards prices could also quickly change if price falls slow or stall.
  • UBS says the housing downturn will continue to weigh on the economy, even if it’s priced in, helping to underpin its view that the RBA will cut official interest rates in the year ahead.

Pessimism on the outlook for Australian home prices may already be factored in, at least according to clients of UBS Australia.

In early February, the bank surveyed over 100 of its buy-side clients on their views on Australian home prices in the year ahead. Unsurprisingly, most were pessimistic, believing the downturn will continue at a similar pace to that seen in 2018.

“On the outlook for house prices over the next 12 months, sentiment is very negative,” UBS says.

71% of respondents were “bearish”, implying falls of between 5% to 10%, while 22% were “very bearish”, indicating falls of more than 10% nationwide. Just 4% expected no change in prices while 7% expected price gains of between 5% to 10%. Not one respondent expected prices to lift by more than 10%.

UBS

“The simple average weighted response implies home prices are expected to fall 7% plus in the coming year, which is probably a bit more negative than the sell-side consensus of economists, but similar to UBS expecting another decline of around 8%,” the bank said.

UBS said most respondents cited credit availability as the chief factor behind their view, followed by a similar proportion that nominated tax and regulatory changes, demand and interest rates as the biggest headwind for prices. Additional supply was seen as a lesser issue for respondents.

So what to make of this relatively small survey of opinions?

To UBS, it suggests that negativity towards prices is likely already factored in, and unlikely to get much worse in the absence of an additional headwind for prices.

“It seems that sentiment towards house prices is unlikely to become materially more negative, without an additional negative catalyst such as a policy change, spike in unemployment or global downturn,” the bank says.

If that is indeed the case, and representative of broader views, it suggests that any change in consumer behaviour, beyond what’s already occurred, may not get any more acute, potentially removing a downside risk for household spending and, as a consequence, Australian economic growth.

However, it also suggests there’s a risk that sentiment towards prices could switch quite sharply should price falls actually begin to slow or stall given just how pessimistic expectations already are.

While pessimism on prices may already be factored in, UBS believes the flow-on effects from prior price falls, along with an expectation that lending standards won’t loosen noticeably, will weigh on the broader economy, underpinning why it sees the RBA cutting Australia’s cash rate by 50 basis points by early next year.

“We continue to expect credit tightening to see ongoing weakness in housing, leading to a negative wealth effect on consumption, resulting in below trend GDP growth, which sees the unemployment rate rise and the RBA cut rates in November and February,” it says.

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