Australia is now experiencing the bottom of the interest rate cycle and the second half of 2017 will be a “turning point” for the market, economists have predicted.
In a research note this week, HSBC economists Paul Bloxham and Daniel Smith said that housing markets in Sydney and Melbourne will cool over the next 12 to 18 months, with the Reserve Bank expected to spur the process by lifting the cash rate early next year.
HSBC is predicting house price growth will slow to 3 to 6 per cent in 2018, down from 8 to 10 per cent in 2017.
House price growth ‘more boom than bubble’
Linking Australia’s housing cycle to the manoeuvres of the RBA in response to the mining boom, they said that high cash rates in 2011 (4.75 per cent) held back housing to “make way” for the mining boom. In later years, cuts to the official interest rate (currently sitting at 1.50 per cent) have fuelled a housing construction boom.
“National housing prices have risen 50 per cent since mid-2012 and much of the rise has been driven by household debt,” the economists said.
“This has reduced housing affordability and also raised questions about whether Australia has a housing bubble. However, just because prices and housing debt have risen does not necessarily mean that there is a bubble. The key question is whether the rise is in line with fundamentals? In our view, to a large degree, it has been.”
They pointed to high demand supported by migration and foreign investment, particularly in the cities of Sydney and Melbourne as factors in the price growth. Discrepancies between demand and supply in both under and oversupplied regions also contributed, they said.
Arguing that these factors explain the price boom, the economists dismissed the theory that Australia is experiencing a housing bubble.
Looking to the future, clampdowns on lending, softer foreign investment and the likelihood of an RBA rate hike (or hikes) lead the economists to predict the slowdown in price growth to 3 to 6 per cent next year.
Adding that they were “sanguine” about the risk of weaker growth in household consumption as a result of cooler market, the economists added: “There is little evidence of a positive wealth effect from the recent housing boom, so we expect that any negative wealth effect, from a slowdown in housing price growth, may be equally suppressed.”
[Related: Housing approvals down by nearly 20 per cent]