House prices will head downhill from March 2016, according to Macquarie, with researchers saying the Australian housing cycle has peaked on a number of metrics.
“Credit growth, auction clearance rates, house prices, settlement volumes and the dollar value of settlements are all showing signs of slowing, albeit from lofty levels,” analysts from the investment bank said in a note today.
The issue is that housing supply is set to surge at a time when demand is slipping due to easing population growth, and major banks are set to feel the sting.
“Population growth is slowing to an expected 1.2 per cent, impacting economic growth potential and expected housing demand,” said Macquarie.
“Against this, housing supply is growing well above trend, which raises the risk of a rapid adjustment.
“Our economics team are forecasting quarter-on-quarter house prices to fall from the March 2016 quarter before beginning to recover from June 2017, with a 7.5 per cent fall from peak to trough.”
Macquarie is one of two heavyweight investment banks to warn of emerging weaknesses in Australia’s housing market, with Credit Suisse analysts warning the sector is becoming riskier than equities and a worse performer than bonds.
Some of Australia’s major banks have already backed away on lending for not just property investment but property development.
ANZ’s head of Australia, Mark Whelan, told The Australian the bank had lowered lending to developers in areas with strong supply to avoid risks from a cooling property market.
That followed August reports that the Commonwealth Bank had tightened lending standards to developers, with Stockland chief Mark Steinert warning some developers were not able to secure funding to build in areas that could potentially have an oversupply problem.
Credit Suisse analysts, in a note to clients, said the deterioration in home-buying conditions has been “particularly sharp in New South Wales”.
“Macro-prudential tightening, out-of-cycle rate hikes on investor mortgages, and weakness in Chinese buying are having a clear impact on sentiment and demand,” they said.
“It is interesting to note that the correlation between sentiment and home sales is particularly strong in NSW but much looser in other states.
“The strength of the correlation, and the extreme negativity of NSW home-buying sentiment, is a worrisome development.”
Further rate cuts were likely, as early as next month, Macquarie analysts said, as slower population growth would “drag” growth lower.
“Residential construction activity has been a key driver of recent strength in domestic activity, as the sector responded to record low interest rates,” Macquarie wrote.
“However, a weaker population growth outlook implies a much lower underlying demand requirements, and will make the adjustment of the housing market to the oncoming surge of supply a more challenging one.”
Macquarie has rearranged its Australian banking stock preference, with Westpac moving to the top of the table.
“We update our order of preference with WBC becoming our top pick in the sector. They are least affected following our analysis and have good leverage to further repricing,” Macquarie said.
NAB moves to number two, CBA are number three with repricing to reduce the impact of a housing cycle downturn and ANZ remains the least preferred given bank.
This article first appeared in The Australian Business Review