House prices to bounce back by end of 2020

While many economists do not foresee a V-shaped recovery in the housing market in the coming year or so, one has a more optimistic view.

Josh Williamson, senior economist at Citi Research, mentioned in a note that house prices will not just stabilise, but will jump by 3 per cent year-on-year (YoY) by the end of 2020.

Citi had previously projected no movement in house prices on an annualised basis by that time.

Mr Williamson’s note explained that Citi’s revised house price outlook is based on the “high likelihood” that the Reserve Bank of Australia (RBA) will drop the official cash rate to a new record low and the Australian Prudential Regulation Authority’s (APRA) proposed change to its mortgage lending guidance that would provide greater flexibility to lenders to set their own serviceability floors.

According to Citi’s bank analysts, APRA’s proposed amendment could result in a 10 per cent increase in borrowing capacity and make home loans available to more owner-occupier borrowers.

The commencement of the federal government’s First Home Deposit Scheme on 1 January 2020 was also cited by the senior economist as one of the reasons for changing Citi’s house price forecast.

“In combination, these changes should add to effective housing demand and moderate the peak-to-trough cycle in established house prices,” Mr Williamson said.

“Our peak-to-trough YoY nominal house price change forecast has therefore been revised from -10 per cent to -7.5 per cent by June 2019.

“Furthermore, we now expect YoY house prices to show growth of 3.0 per cent by December 2020, whereas previously we had no increase.”

As dwelling prices have been falling since September 2017, by a cumulative 7.9 per cent nationwide, other economists have been more cautious with their forecasts.

For example, ANZ Research economists Felicity Emmett and Adelaide Timbrell identified “green shoots” in the housing market, with property price falls beginning to “moderate” and buyer sentiment on the rise. However, they said a “V-shaped” recovery from the current downward trend is unlikely.

Drawing on the latest data from property research group CoreLogic, the ANZ economists noted that they expect a further 5 per cent fall in national home values in 2019 – taking the cumulative peak-to-trough decline to 15 per cent – before stabilising in 2020.

“Price declines in Melbourne and Sydney are already starting to moderate, suggesting we are most likely past the worst of the housing downturn,” they said.

A similar sentiment was expressed by CoreLogic’s head of research, Tim Lawless, who said that a range of indicators, including home loan activity and auction clearance rates, show that the housing market may have “moved through the worst of the downturn”.

More broadly, while APRA’s announcement in combination with the returned government’s First Home Loan Deposit Scheme commitment are positives for the housing market, Mr Williamson said these are “unlikely to reduce the amount of spare capacity in the economy”.

“With the RBA hurdles around [consumer price index] inflation and higher trend unemployment arguably met, it was, in our opinion, only a question of ‘when’ and not ‘if’ the RBA would loosen policy further.

“Thanks to governor [Philip] Lowe’s [recent] comments, we are closer to the ‘when’ part of the picture. We now look for a June rate cut and bring forward our November 25bp cut to August to help stabilise employment growth and increase the likelihood that CPI inflation is consistent with the forecasts provided in the May [Statement of Monetary Policy].”

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