‘Deeper’ slump expected in ‘unique’ housing downturn

Housing values are expected to decline by 15 to 20 per cent in Sydney and Melbourne, to reflect the impact of continued credit policy tightening by Australian lenders, according to ANZ Research’s forecast, which was revised from an expected decline of 10 to 15 per cent.

The ANZ Research report noted that the cause of the downturn in the housing market has been “unique”, stating that it has been driven by a “tightening in credit availability, rather than the cost of credit”. 

“The uniqueness of this cycle makes it tricky to assess how long the current downturn might persist,” the report noted.

Further, ANZ Research stated that unlike previous housing downturns, a rate cut from the Reserve Bank of Australia (RBA) would be unlikely to trigger a rebound in the housing prices.

“The RBA will be cautious about cutting rates given the potential of re-inflating the housing market and reigniting financial stability concerns,” ANZ Research added.

“More importantly, the economy is in good shape despite weaker house prices and does not need lower rates.”

However, ANZ Research stated that it expects the central bank to refrain from lifting the cash rate while housing values continue declining.

“Although households and the economy more broadly have absorbed falling housing prices quite well, we think the RBA will be cautious about adding to the downside risks by tightening while housing prices are under a reasonable degree of downward pressure,” the reported added.  

The analysts said that despite a price fall of 15 to 20 per cent would reduce property prices in Sydney and Melbourne to 2005 levels, they expect an “orderly correction”.

However, ANZ Research said that it expects some borrowers to fall into negative equity, and predicted that the price decline in Sydney and Melbourne would “spill over” into other capital cities.

“There will be some purchasers who will lose money or may have negative equity,” ANZ Research continued.

“This is largely a Sydney and Melbourne story, though, where price rises and subsequent falls have been steepest and the investor segment largest.

“We think there will eventually be some spillover from these two cities to Canberra, Brisbane and Adelaide.”

The analysts concluded: “However, we do not expect price falls in these cities to be as significant as in Sydney and Melbourne because they don’t have the same concerns around highly leveraged borrowers and a lack of affordability.

“While the Perth and Darwin markets are expected to remain weak, this is based on the ongoing adjustment away from the mining boom, rather than issues around credit tightening.”

[Related: OECD calls for vigilance amid Aussie housing slump]