Housing market peaked but not set to ‘crash’

Having peaked at over 6 per cent of nominal GDP and rising consecutively for over four years, its longest ever boom, UBS investment bank “called the top” of housing activity in its latest report Australian Economic Perspectives on Australia’s housing outlook.

However, the investment bank insisted that despite peaking, a housing market crash is not on the horizon.

“We are ‘calling the top’, but stick to our forecasts for commencements to ‘correct but not collapse’ to 200,000 in 2017 and 180,000 in 2018,” the investment bank said in its report.

“Housing prices keep rising (faster than income), given the RBA’s rate cuts in mid-2016 helped lift demand. Looking ahead price growth has likely now peaked, and we see a moderation ahead amid record supply and poor housing affordability.

“However, we still don't seen prices dropping given booming people growth.”

Further, while UBS expects commencements and activity to have a “sharp downturn” until the end of 2018, the lack of RBA rate hikes “reduces the likelihood this evolves into a crash” where commencements plunge to prior cycle lows closer to 120,000 to 130,000, which would lead to a weaker labour market and falling prices.

The investment bank’s comments come after BIS Oxford Economics managing director Kim Hawtrey emphasised that Australia is experiencing a property boom “like no other”, which will result in a “historic reversal”.

Speaking at a forecasting conference in Sydney in March, Mr Hawtrey explained that the country has been experiencing a “phenomenal” bull market since 2012, driven by factors such as low interest rates and strong foreign investor interest.

“We've been talking a pretty good game for a few years now, but the question it poses is, do we need to jog our memory about what happens next? What is history's guide to how bull markets usually end?

“A typical bull phase roughly lasts for three years and the average dwelling commencements go up by a ratio of four to 10. One of the upshots of this is that we're in unchartered waters, looking at the latest cycle,” he explained. “A historic boom is going to mean a historic reversal too.”

However, like UBS, AMP chief economist Shane Oliver emphasised that the housing market is unlikely to crash unless the RBA was to raise interest rates significantly.

“To have a problem, you’d really have to have the RBA raise interest rates significantly and that be passed on by the banks,” he said.

“But the RBA isn’t stupid, it wouldn’t just keep raising rates until there were mass defaults occurring in the property market, because it would see no reason to crash the property market. It would want to slow things down if they’re starting overheat.”

Indeed, UBS said in its report that while macro-prudential policy is likely to lead to some tightening of credit conditions that will weigh on housing demand, interest rates will likely remain the “dominant driver” of the cycle.

“Historically (at least over the last 30 years), approvals only corrected materially after a significant RBA rate hike cycle, which is still quite unlikely at least over the coming year.

“Ongoing depressed consumer sentiment towards housing, and macroprudential tightening point to a sharp retracement of housing activity ahead. But, the RBA's rate cuts in mid-2016 reinvigorated demand for home loans and building approvals, and pushed up house prices from already record-high valuation levels,” UBS pointed out.

Finally, ahead of the RBA’s next monthly meeting next Tuesday, UBS said that while the country’s central bank is worried about housing, it is likely to keep rates on hold for the foreseeable future and instead use macroprudential tightening, particularly on interest-only and high-LVR loans.

[Related: Lawyers call out property bubble, flag ‘significant risk’]