Goldman Sachs has poured cold water on the notion that the Australian property market will collapse, instead predicting a gradual cooling of home prices even as the Reserve Bank may make two more cuts to official interest rates.
Record-breaking growth in home prices in Sydney, and to a lesser extent Melbourne, have flamed concerns of a growing property bubble and the risks that a collapse in the market would present to the financial system and the economy.
Goldman Sachs researcher Matthew Ross said despite housing-leveraged equities on the stock market sending a strong signal that the property market could “roll over”, there was little chance of a dive in housing prices.
“While we have been highlighting these downside risks increasingly over the past year, we do not believe house prices are going to fall materially from here nor do we believe that activity in the housing market is going to fall away sharply,” Mr Ross said.
Sydney home prices are 42 per cent higher since their previous peak in 2010, while Melbourne houses are 18 per cent more expensive. The Australian Prudential Regulation Authority has sought to cool down the market by placing limits on investor lending and while jacking up capital requirements. APRA chairman Wayne Byers today said he wished the regulator had begun cracking down on the banks “a bit sooner”, revealing the extent of the regulator's concerns.
But falling auction clearance rates and declining house price growth are now prompting worries that the property bubble is set to burst.
Fresh data from Domain today showed that after months of ultra-strong growth the median house price in Sydney rose 3.2 per cent over the three months to September - the lowest quarterly rate of growth recorded since March 2014.
Since February, stocks which are leveraged to Australian housing have fallen by an average of 17 per cent -- 12 per cent more than the average company in the top 100 local stocks, according to Goldman Sachs.
Mr Ross said the declines in stocks linked to property had been fuelled by house price growth cooling and auction rates falling, rising vacancy rates and record-low rental yields, and evidence that building approvals were peaking while new starts on housing construction were falling.
Meanwhile, he said macro-prudential tools to shore-up banking capital reserves were pushing up mortgage rates and dampening cheap credit supply, while the prospect of tighter Chinese capital controls could lead to problems in the settlement of the local apartment market.
But Mr Ross said the RBA may cut rates again in November and March, which would take the official cash rate to a record low of 1.5 per cent, which would help to stabilise the housing market while activity levels gradually cooled.
“Against this backdrop, the risk-return in housing exposed names is now looking more balanced, in our view,” Mr Ross said.
Credit Suisse analysts Damien Boey and Hasan Tevfik meanwhile argued that housing risks remained elevated.
“Equity investors should tread with caution around housing exposed stocks, where valuations are yet to reflect the rise in risk,” the analysts said.
Credit Suisse’s preferred measure of housing risk is currently elevated by historical standards, the analysts said, and was higher than the Australian VIX, which measures volatility -- or fear -- on the local stockmarket.