House prices could fall by as much as 15 per cent peak to trough, according to Morgan Stanley, which has revised its outlook downwards amid weakening economic signals.
The latest forecast from Morgan Stanley weighs a series of factors: not only tight credit conditions and rising servicing conditions but also the gap between housing completions and the net increase in households.
“We struggle to see improvement in any of our components over the next year,” analysts Daniel K Blake, Chris Nicol, Antony Conte, Chris Read wrote in a research note this week.
“We now see a 10-15 per cent peak to trough decline in real house prices (from 5-10 per cent), which would mark the largest decline since the early 1980s.”
“With households 2x more leveraged to housing than back then, the impact on housing equity would be larger again.
“This downgrade largely reflects the downturn’s extended length, as we expect the relatively orderly declines to date will continue.
“However, an acceleration of declines are in our bear case, and we will continue to monitor stress points, including arrears trends.”
The Morgan Stanley view is the latest in a series of downgraded forecasts from the major banks and research houses.
NAB predicts the correction in house prices will continue over the next 18 to 24 months with Sydney falling around 10 per cent peak to trough and Melbourne 8 per cent.
Economists at ANZ have taken a similar view, after dramatically downgrading their price outlook three months ago to a 10 per cent peak to trough forecast fall for Sydney and Melbourne.
Last month, the ANZ team extended that forecast, warning that the current weakness in house prices will extend into 2020, driven lower by tighter and more expensive credit.
Dwelling prices have dropped 2.7 per cent on an annual basis across the country, with Sydney falling hardest, by 6.1 per cent, and Melbourne down 3.4 per cent, according to figures this month from CoreLogic.
Among the factors that worry Morgan Stanley’s analysts is the gap between newly completed apartments and demand, which they term the “overbuild”.
Net migration is a factor
Official figures this month show that new dwelling approvals fell to their lowest level in almost two years in August and Morgan Stanley expects construction activity to continue declining, especially in the apartment segment.
“This would reflect some projects being shelved, given tighter credit conditions.” they wrote.
Notwithstanding that, the analyst note that run-up in construction from the east coast apartment boom “continued longer than we expected” with housing completions at around 215,000 on an annualised basis.
At the same time on the demand side, net migration has “fallen noticeably” over the past few quarters, prompting the Morgan Stanley analysts to trim their underlying demand estimate to around 175,000 dwellings.
“Strong employment growth and temporary migration has helped contain reported vacancy rates thus far, but we see a sustained overbuild into 2019 weighing on rentals,” they wrote.