Not everyone believes property is in for a soft landing

It was an interesting last week: on the same day I read three divergent property reports:

In one report, investment bank Morgan Stanley took a gloomy view on our property markets suggesting the outlook for property was the worst it had been for 30 years.

In another, NAB revised its house price forecasts and now expects values to fall a little further in Sydney (-3.4%) and barely rise (0.1%) in Melbourne

On the other hand the ANZ Bank was more optimistic, suggesting that most of the slowdown has already occurred and property values are going to pick up in the second half of this year. “Housing price growth has been slowing but there is still no evidence of a hard landing ahead,” the bank said.   

Who’s right?

For mine, while house prices have slipped in some capital cities and growth has slowed in others, I don’t see any reason for further significant falls in property values. Here are six charts to explain why. 

The current state of play

Corelogic reports house prices around Australia are only 1.2% higher than they were a year ago.

As you can see in the table below, the markets are quite fragmented, and overall, regional properties performed a little better than capital cities over the last 12 months

Source: Corelogic

Source: Corelogic

In Melbourne and Sydney apartments outperformed houses, but in every other capital city houses outperformed apartments.

Interest rates are likely to remain on hold

With no rises in official RBA interest rates in the foreseeable future and the Australia Prudential Regulation Authory hinting it may relax restrictions on investor lending, at a time when the big banks hungry for business, there are no interest rate shock waves likely to hamper our markets.

Source: RBA

Our population is growing strongly

Our strong population growth will underpin our property markets.

Australia’s population increased by 1.6% or 388,124 persons over the 12 months to June 2017, with over half of this made up by immigration.

Source: Corelogic

Vacancy rates are falling

It seems that we are not building enough houses, with vacancy rates falling across our nation and rents slowly rising.

Source: ANZ Bank

We’re creating more jobs

Close to 400,000 jobs were created last year, with over three quarters of them being full-time jobs.

New South Wales punched above its weight, adding 140,000 jobs in 2017, while Victoria added 87,000 jobs.

Source: MyHousingMarket

First home buyers are back in the market

First home buyers are replacing investors at the lower end of the market, particularly in Victoria and NSW where government grants and stamp duty discounts are helping them enter the market.

Source: ANZ Bank

Source: MyHousingMarket

The bottom line

Sure house price growth has slowed, and auction clearance rates have dropped, but this is expected at this stage of the property cycle.

We already know that APRA’s macro prudential controls have helped our property markets glide into a soft landing as the positive growth drivers outweigh the negative influences.

And we’ve now experienced a sustained period of low interest rates, so the positive influence of cheaper finance is no longer driving property price growth.

The main medium term risks for our markets would be more interference by APRA making it harder to get finance, or a rate rise by the Reserve Bank. But with neither of these likely to occur in the near future, our property markets will perform more strongly in the second half of 2018.

The new ANZ model for house price growth similarly suggests property prices will hold up better than other researchers forecast. The bank predicts a turnaround in our markets as the year progresses and price gains in all our capital cities in 2019.

Source: ANZ Bank

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