Merrill Lynch: Housing Price Growth Will Weaken In 2015

House at Hanging Rock by Kerstin Thompson. National Architect awards.

House price growth in Australia appears set to decelerate markedly in 2015 with challenging economic conditions.

“We expect only very modest dwelling price growth in 2015 with downside risks in 2016 as interest rates move higher,” says Saul Eslake, economist at Merrill Lynch Australia.

The weakening house price growth follows soft wages growth, low sentiment, rising unemployment, deteriorating affordability and as the impact of low interest rates fades.

Eslake says house prices will converge with “fair value” estimates based on household income growth and mortgage rates, as this chart shows:

With no change in interest rates house price growth will slow to at least the rate of income growth, forecast at between 3.5% and 4% in 2015.

And in 2016 the Reserve Bank is likely to raise interest rates, further suppressing growth.

Eslake sees very modest house price growth in 2015 and perhaps decreases in real terms.

“The risk will then become for outright declines in house prices as the monetary policy tightening cycle likely begins in 2016,” he says.

The key to the outlook: “If house prices growth decelerates and perhaps even declines in real terms this could weigh on consumption and dwelling investment into 2015. This supports our below trend forecast for economic growth in that year.”

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