Housing correction but not a collapse, USB says

THE housing market and the foreign investment led super-boom have peaked and residential property values are tipped to grow by only 0-3% in 2018, UBS forecast.

UBS’ latest report “Housing: is our 'calling the top' becoming a crash?” said the housing market is unlikely to crash if the Reserve Bank holds interest rates steady.

The report’s authors George Tharenou, Scott Haslem and Jim Xu said their analysis shows the housing construction cycle is peaking and a turning point in foreign demand.

UBS has cut its forecasts for commencements to 195k in 2017 down from 200k and 175k in 2018 from 180k.

“The historical trigger for a sharper housing downturn is RBA rate hikes, but given they're on hold amid macroprudential tightening, we still see a housing 'correction, but not a collapse',”

The analysts said listed companies still generally report that actual 'settlement cancellation rates' remain very low.

“This is consistent with the boom in 'people growth' resulting in a surprisingly solid trend of the residential rental vacancy rate in both Sydney (remaining exceptionally low around 2%) and especially Melbourne (actually declining over the last year to <2½%),”

The analysts noted that the Foreign Investment Review Board data on approvals for foreign investment in Australian housing had skyrocketed in prior years, from only $17bn in 2012/13 to a record $72bn in 2015/16 – more than tripling across three years (mostly in 'new' housing, rather than 'established/existing').

“However, growth slowed in 15/16 to 'only' 19% y/y. Indeed, comments by Treasurer Morrison indicate a sharp fall in the last year, with the number of approvals down to only ~15k, from ~40k previously.

“That said, the extent of this fall may be overstated due to the introduction of higher fees for applications during that time. Nonetheless, with taxes on foreigners rising and tighter policies, there has likely been a clear direction change for foreign investment, from the prior secular booming uptrend, to now a slower level of investment ahead,” they predict.

Despite the construction cycle and foreign investment peaking, the analysts said at least for now, the housing market still does not pose a major systemic issue for house prices or the broader economy in the near-term.

“But we are watching the vacancy rate as a key indicator of the supply/demand balance,” they warned.

“If vacancy did jump ahead, causing house prices to fall over the coming years, then the incentive to 'walk away' would materially rise, and the risk of a negative feedback loop to the real economy (especially via the 'household wealth effect' on consumption) would increase.

“Nonetheless, under our base-case view of a 'correction but not a collapse', we see a 'muddle-through' outcome, which leaves the RBA holding the cash rate steady over the coming year,”

UBS predicts prices will rise by 7% in 2017 but will only grow by 0-3% in 2018.

“Dwelling prices just keep rising. After prices surprisingly re-accelerated to 13% y/y in Mar-17, we 'called the top' of growth, with some moderation to a still strong ~10% now. But amid weaker sentiment towards housing & a sharp deterioration of housing affordability, we still see further slowing to 7% y/y by end-17.

"We then expect only 0-3% growth in 2018, as the lagged impact of higher interest rates and tighter macroprudential policy more noticeably weaken demand ahead,” the analysts said.

The analysts said the housing market is unlikely to crash as long as the RBA keeps interest rates steady.

“Macroprudential policy tightening (including caps on credit growth and interest only loans) is likely to lead to some ongoing tightening of credit conditions and higher mortgage rates that will weigh on housing demand ahead.

“However, it still seems likely that interest rates will remain the dominant driver of the cycle. Indeed, historically, approvals only slumped after a significant RBA rate hike cycle, which is still quite unlikely, at least over the coming year,” they said.

Australian Property Journal