Australia’s housing downturn ‘by design’

  • BAML analysts say Australia’s housing downturn is a direct result of macro-prudential measures to curb investor lending.
  • As a result, it’s “by design”, and BAML said an “orderly adjustment” is a net-benefit for Australia’s economy.
  • For the downturn to turn into a crash, BAML said there would need to be a sharp rise in mortgage rates or unemployment levels.

Benchmark interest rates are almost certain to stay on hold at 1.5% when the RBA makes its monthly policy announcement this afternoon.

But with Sydney and Melbourne house prices still falling, there’ll be extra focus on the RBA’s housing commentary — particularly regarding tighter credit conditions.

However, when it comes to house prices, Bank of America Merril Lynch (BAML) says the RBA will be in no rush to indicate a shift towards more supportive measures.

“We do not expect the RBA to respond to the correction with a signal it might ease policy,” the BAML team said.

They backed up their argument with this chart, which shows Australia’s household debt levels are still “a key macro risk”:


‘Not a crash’

Sydney house prices have fallen by 7.4%, and indicators suggest the current Sydney downturn could end up being the longest in history.

But BAML were pretty categorical in their assessment; although prices are falling, “it is not a crash”.

Rather, the falls are a direct result of macro-prudential measures introduced to curb loans to investors.

And BAML sees that as a positive, in the sense it’s helping to reduce systemic risks posed by excessive household debt.

“The slowdown is by policy design and so an orderly adjustment is welcome and leaves the country less vulnerable,” BAML said.

If the downturn was to turn into a crash, there’d need to be either a sharp lift in mortgage rates or an extended rise in unemployment.

BAML shares the view of multiple analysts that in an environment of falling house prices, the strength of the labour market becomes critical.

“As long as the labor market holds up it is difficult to see a hard landing for housing,” BAML said.

“Population growth remains strong to shore up underlying demand and supports ongoing infrastructure spending across the states.”

Labor party tax changes

The next Federal election must be held by May 18 next year and Labor party is firming up as the favourite to win.

The ALP is likely to head into the election with a policy platform to reduce the tax benefits from negative gearing and capital gains tax.

Some analysts have speculated that this could further exacerbate price falls, but BAML doesn’t seem overly concerned.

Firstly, the analysts said the changes “might not even get through the Senate in their current form”.

And if the downturn does become more entrenched, Labor could respond by “reviewing the timing or scope” of any proposed changes.