Sydney:House prices are cooling, not crashing – but may force RBA cut, Citi says

Citi's modelling anticipates house price growth to slow to 4 per cent in 2016-17.T

he housing market isn’t crashing, but it is cooling, which could force the Reserve Bank of Australia to cut interest rates again, Citi economists say.

Stretched valuations that have fuelled speculation of an impending crash had been driven by under supply in the market, which peaked at 49,000 dwellings in 2013-14, versus the RBA’s estimate of 13,000, economists led by Paul Brennan said in a research note.

If all potential pipeline construction for apartments comes into market, it will pose a significant downside risk to price growth for the next two years.

Paul Brennan, Citi

Citi expects the under supply will narrow to around half that rate on average over the next two years. Population growth will slow as the mining boom winds down and immigration levels drop, while regulatory restrictions will lower demand for property from investors and foreign buyers.

Citi’s modelling anticipates house price growth to slow to 4 per cent in 2016-17. Photo: Glenn Hunt

“This narrowing should underpin ongoing slowdown in house price inflation, from 10 per cent in 2014-15 to 0 per cent to 5 per cent in 2015-16 and in 2017.”

Gradual slowdown

The slowdown would be gradual, as supply remained strong with plenty of construction in the pipeline. Building approvals hit a record 230,000 in the 12 months to September. But the risk in this cycle was that apartments being built were outstripping houses two to one.

Citi says house price growth is expected to cool from 10 per cent this year to between 0 and 5 per cent in the next two years.Citi says house price growth is expected to cool from 10 per cent this year to between 0 and 5 per cent in the next two years. Photo: Michele Mossop

“If all potential pipeline construction for apartments comes into market, it will pose a significant downside risk to price growth for the next two years,” Mr Brennan said.

“Given this significant pipeline of work, especially for apartments, our forecast is for a gradual, rather than rapid, decline in activity over the next few years, assuming interest rates do not rise sharply.”

This long pipeline also means housing activity should support economic growth, but as the housing peak has passed, the contribution to the economy may be halved from 0.5 per cent this year to 0.25 per cent.

House prices are expect to cool, but not crash entirely.House prices are expect to cool, but not crash entirely.

Citi’s modelling anticipates house price growth to slow to 4 per cent in 2016-17 and 3 per cent in 2017-18, and other economic challenges may mean the RBA will be forced to cut interest rates again below the record low 2 per cent.

“With housing prices cooling, consumers still cautious about spending, housing construction expected to make a smaller contribution to growth and no concrete signs yet of a recovery in non-mining business investment, interest rates will need to stay low for longer than normal,” Mr Brennan said.

“Indeed, our central case for over six months has been that the RBA could cut the cash rate again to 1.75 per cent.”

Signs of improvement from job numbers may have reduced the chance of another cut, but Mr Brennan said inflation was also expected to track below expectations.

“Consequently, further easing remains a live option in our view,” he said.

Reporter

Vanessa Desloires

Source : http://www.smh.com.au/  ( The Sydney Morning Herald)