Can the Housing Market Collapse?
By Josh Williamson
From predictions of a halving in house prices by US doomsayer and economist Harry Dent to mainstream media warnings of various scenarios that could lead to property Armageddon there are an abundance of viewpoints pointing towards a major property downturn.
It’s a view we don’t share at Citi and it’s not supported by comments from the Reserve bank of Australia. In a recent speech RBA governor Philip Lowe said housing price declines in the largest cities over the past year combined with tighter lending standards and reduced demand from investors had combined to lower risk from a housing bubble, although it’s an area that still needs to be monitored.
Source: ABS & Citi Research
He also said the current unemployment rate of 5.4 per cent was trending lower and could in the years to come set a new and lower benchmark for what is considered full employment – it's currently 5 per cent.
And population growth at 1.5 per cent is strong compared to developed nation peers and due largely to healthy immigration numbers.
An interesting aspect of immigration is that it tends to come from lower age brackets and the impact is that Australia’s population is not aging as fast as forecast just a few years ago. Add in slowly improving consumption and strong global growth and you get the impression Lowe is quite pleased with the overall shape of the economy, although he is in no rush to increase interest rates until the improvements are more sustainably imbedded.
“Over the past five years, over 80 per cent of net overseas migration has been accounted for by people under the age of 35” RBA governor Philip Lowe
In our view, the most recent housing finance data supports an expectation that the correction in the housing market is proceeding in an orderly fashion and is not dissimilar to earlier corrections. Key points to support that view include:
- The value of owner occupier finance commitments has shown little change over the past twelve months while the value of investor commitments has fallen sharply, although not at a rate that is unusual in corrections.
- The latest finance data also show that owner occupier loan size remains around its highs. This, and the resilience of owner-occupier lending, are consistent with continued low levels of interest rates.
- There has been a marked pullback in the level of foreign investment in the housing market and housing supply has surged, belatedly overtaking demand. That said, the correction in prices remains orderly. This in turn owes much to the ongoing relatively healthy state of the broader economy.
- While the correction in lending and house prices remains orderly and consistent with previous cycles it is hard to see the RBA retreating from its guidance that the next interest rate move is up, even though it is unlikely to act for an extended period.
Josh is an economist for Citi Australia
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