This article originally appeared on The Drum at this link 


We’re almost certainly a million miles away from a house price collapse

As 2015 draws to an end, there is little doubt that the stars are moving into line to see a slowing in house price growth. But the pessimistic forecasts from some commentators are over the top, writes Stephen Koukoulas.

Just because a market stops going up, it doesn’t mean it is about to crash. And so it is with housing in Australia at the moment.
The good news is that the extraordinary and unrelenting rise in Australian house prices appears to be coming to an end. The big question is what sort of house price growth slowdown – or perhaps price fall – is likely over the next couple of years.

There seems to be an informal race from some analysts and commentators to see who can come up with the most pessimistic forecast. Some fringe economists, adept at getting media coverage with outrageous forecasts, are looking for huge 20 or 30 per cent price falls, while others throw out emotive language about the looming house price collapse and that this will lead to Australia’s first recession in more than a quarter of a century.

Such extreme views seem to be based on some sound reasons for why house price growth will slow. There have been policy changes that mean bank capital requirements have increased, which adds to their funding costs, and this cost will be passed on to mortgage holders through higher interest rates. There has also been a tightening in lending criteria for investors and some risk of an oversupply as the current housing construction boom adds significantly to supply. There is also an issue with the high levels of household debt – the thought being that this will somehow feed into a price collapse when some currently unforeseeable event (sharp interest rate rises, perhaps) are delivered sometime in the future.

These are all valid concerns, but they overlook some key factors that will all but certainly make the looming house price weakening measured and restrained and a million miles away from a price collapse.

It is also vitally important to recall that policy makers at the Reserve Bank and in the Government have been hoping for a weakening in house price growth. It does add to market and economic instability and risk and does impact on affordability, usually for first home buyers and young people looking to move to better housing in line with their life cycle.

The wish for more moderate house prices has been thwarted by a number of key factors including the need of the RBA to cut interest rates for the sake of the whole economy as it works to counter the effects of the terms of trade slump. Also important in driving this last leg of the property boom has been frenzied buying from investors who have given up on buying shares or holding money in bonds and term deposits given how poor the Australian stock market has done and how low interest rates are.

As 2015 draws to an end, there is little doubt that the stars are moving into line to see price growth stall. Mortgage interest rates are no longer falling and could be edging up marginally, in part due to the government implementing the recommendations of the Murray financial system inquiry requiring the banks to hold more capital as a buffer against any future economic shock. The regulations concerning lending for investment purposes also appear to be working, with investor finance growth starting to slow, albeit from a break-neck pace.

There is also a clear supply and demand swing with record dwelling construction occurring at exactly the time population growth is slowing. While it is difficult to judge at this stage, there could be excess supply of new housing – a glut, in other words – unfolding in different cities. Economics 101 tells us that when there is a build up in supply relative to demand, prices weaken.

That said, the current housing construction boom may be topping out which will limit any excess supply of new dwellings. Recent Australian Bureau of Statistics data shows that dwelling building approvals data peaked in March 2015 and have been trending down ever since. The supply boost as a dampener for house prices may run its course within 12 months.

The usual causes of house price crashes overseas (Australia has not had one for more than 100 years) are linked to rising interest rates, a severe tightening in credit conditions, bank failure, sharp increase in unemployment or severe overbuilding that creates a glut. None of these are remotely on the radar for Australia at the moment which means that the house price moderation will be just that and not much more.

The RBA would not be silly enough to tighten monetary policy if any housing downturn threatened to undermine the economy. Indeed, it would do the opposite and ease policy to head off a slump or recession.

My expectation is for Australian house price growth to slow to about zero during 2016 and to stay weak at plus or minus 5 per cent for a couple of years after that. This means there will be some specific areas or houses where prices fall, but overall, such a moderation will help affordability over the medium term as incomes keep growing.