Has Australia’s housing market peaked?

A group of economists from UBS, including Scott Haslem, believe that Australia’s housing market has peaked. He explains why exactly they think that.

Has Australian Housing Market Peaked?

Ross Greenwood: I do want to get to something which I think is a big, big call. Plenty of people have tried to do this in the past and got it wrong. It is a big call to do it right now but the Australia’s housing market, where does it sit right now? Well, according to the Global Investment Bank UBS, right now, it is at its peak. In other words, they’ve called the top. As I said, this is a big thing to do for an economics house, for a big investment house such as UBS. Well, Scott Haslem and his team have basically said while they believe the historical trigger for our housing down turn, that is, the reserve bank raising interest rates, is missing, that mortgage rates are rising and the sentiment of home buying has fallen to a near record low. Let’s get the chief economist of UBS in Australia, Scott Haslem, on the line right now. Many thanks for your time, Scott.

Interview with Scott Haslem, Group Economist UBS

Scott: No worries, Ross Greenwood, good evening.

Ross Greenwood: Good to talk to you as always. It is a big call, isn’t it? You’ve got to make your judgment, you’ve got to make your line call, but it’s still is a big call calling the top.

Scott: It is a big call, but again, we are calling a painting and construction activity suggesting that over the next couple of years we won’t build as many multi-story homes. We’re not calling native house prices. I agree, many people have called that and failed, what we are suggesting is whilst house prices will probably continue to go up a little bit to the next year round, we expect them to flatten out in 2018.

Ross Greenwood: The problem is as the average prices flatten out, they are going to be pockets where there’s got to be– perhaps the market’s just got to be hot, where you might see price falls. Other areas might just keep on moving along, ticking along like they do. The keys here clearly are employment, regional employment is going to be one of the keys and therefore regional housing stress.

Housing Prices in Capital Cities

Scott: I think that’s right. I think we’ll see some– often when the housing market flattens out, some of the more expensive inner ring, inner areas do tend to show a little bit more downward momentum in prices. I think there’s a risk, we’re probably overbuilding multi-story apartments in some narrow segments in inner city Sydney– sorry, not so much Sydney but Melbourne and Brisbane. There’ll probably be some areas there where you would anticipate some price falls coming through.

The reason we are not calling really for a crash or anything like that is because there’s really strong population growth in Australia. The recent house prices are expensive as we probably haven’t built enough homes over the last few decades. The labor market, it’s not booming but it’s holding together okay.

Ross Greenwood: Okay, I really like one part of this report that you said. You’ve actually looked at the international crane count. Now, the number of cranes on high rise buildings in our capital cities is always a bit of a sign of development of office space and others, but these days of course, it’s actually the cranes that are going up on those multi-story apartment blocks that you are talking about, that gives some sense as to just the activity that is taking place. What have you found out?

Scott: Well, what’s really interesting there firstly, is it’s flattened out year on year now. That’s part of the idea that we’re probably at the peak, that’s part of the call, is we are not seeing more and more cranes going up. There are still three times more cranes than there were a few years ago, but there’s still a lot going on.

The other thing that’s really interesting is when we look at Brisbane or we look at Melbourne, it’s all very concentrated in the inner city part which is all the multi-story. Particularly in Brisbane and to some extent in Melbourne, that does make you a little bit concerned. Whereas when we look at New South Wales and Sydney, the cranes are all along the train lines and they are all very spread out.

Interest Rates

Ross Greenwood: You talk again about the Reserve bank and it raising interest rates, which is normally a common factor in housing coming off, that’s not there at the moment. But the fact is that banks and other financial institutions are raising interest rates and they are making it more difficult, in particular for investors, to continue to fuel the house prices. At some point, it’s inevitable that if the house prices keep on rising, they’re going to reach the level of affordability of the typical person in Australia. It would appear in many of the capital cities that you are already there or beyond that. That’s one of the other issues in regards to this call I would have thought, Scott.

Scott: Yes, I know, that’s exactly right. This is part of putting together the pieces of the puzzle. We know that the RBA hasn’t been increasing interest rates, but we know that banks are. We know that they are going to be limiting not only the amount they lend, but the interest only loans which are the obviously more affordable because you’re not paying principle. One of the points we make in our report is that whilst servicing costs, if we just look at the interest part, is very low because interest rates are low if we look at principle and interest.

If you are paying a normal mortgage, the price of that for a new borrower has really gone up, almost 25% over the last couple of years, because house prices are going up. We’re saying it’s a combination of the banks tightening things up, but also affordability probably in the levels where some of the demand is probably going to drop away a little bit. Of course we’ve got all these supply coming over the next year as well.

House prices going sideways

Ross Greenwood: It’s funny, Scott, because your scenario that you paint here, is almost the ideal scenario that the government and bank regulators would want to occur in Australia. In other words, rather than having some 10%, 15%, 20% fall in values, which clearly could spike a broader economic problem, if you’ve simply got house prices going sideways and moderating, and okay, yes there’ll be some areas where they’ll rise, other areas where they’ll fall, but if they’re on average going sideways, that’s pretty much the ideal scenario for those bank regulators who have tried to take the sting out of the market without necessarily triggering a collapse.

Scott: No, that’s right. I guess there’s some risk that we’re being a little bit too optimistic that we could see more oversupply in some areas, it creates more downward price pressure, but I think the policies that the regulators have introduced are really sensible policies in terms of just leaning against the housing market a little bit, making sure we lend to the right people, tightening up supply, probably leaning against demand a little bit. It does give you a reasonable chance that you get a correction without a collapse and you just get some coming off in construction with a flattening out of house prices.

At the end of the day, the RBA wants more housing supply. They want to– this is how you get away from this big upward movements in prices, it’s to build more homes. No one wants to kill the housing construction, we just want to make sure that it all works together sensibly.

Ross Greenwood: There’s no doubt, because long term, if you think that Australia’s population is forecast, well in the capital cities, you’ve got Melbourne and Sydney going to eight million by 2060, Brisbane and it’s surrounds go to four million by 2060, you’ve got to have more houses over the longer term as well. Scott Haslem is the chief economist at UBS, one of the biggest investment banks in Australia and around the world. As I say, calling the housing market top is a big, big call, but you can see now the rationale. I’ll take your calls on this as well, 131873. Scott Haslem, we appreciate your time here on Money news.

Scott: Thanks Ross Greenwood


Other useful links

Mortgage Delinquencies Rising

Two hottest housing markets show signs of slowing down in April


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