Morgan Stanley says the national house prices here are set to plummet 20pc
Australia will be hit by a full retracement of any post-Covid price gains, Wall St bank Morgan Stanley says.
Australia is facing double the impact of its last house price correction, according to Morgan Stanley, which warns that house prices will fall 20 per cent nationally peak to trough.
The Wall Street bank has worsened its forecast from earlier expectations of a 15 per cent fall, joining the ranks of economists who are taking an increasingly negative view of the sector.
Their fears about the impact of a house price correction are accelerating as the equities market tanks and the wealth effect of falling asset prices hits consumer confidence.
Morgan Stanley said that a 20 per cent fall would be the largest nominal price decline in at least the past 50 years, at more than twice the size of the previous largest correction of 10 per cent in 2017-19.
The bank warned that would be a comparable adjustment to what was seen during the GFC in the US, when prices dropped by 19 per cent from 2007-12, although Australia’s adjustment would come with much larger equity buffers and be a much faster correction.
While the Reserve Bank does not officially forecast house prices, RBA governor Philip Lowe recently stated that he “would not be surprised” to see a 10 per cent fall in house prices.
Morgan Stanley’s team, led by its head of Australian strategy and economics Chris Nicol, said that the policy outlook continued to move quickly and it now expected a higher RBA terminal rate of 3.6 per cent.
“The RBA faces a tough balancing act between sharp adjustments in rate-sensitive sectors and a more entrenched inflation pulse; we think the recent shift to a higher global rates outlook will keep it hawkish near term, raising rates further above its neutral estimate,” they said.
They also predict a stronger migration recovery, moving above the pre-Covid run-rate in 2023 on the back of recent government announcements.
But in the meantime, a sharp housing reversal was forecast with the bank expected the entire post-Covid price boom to be retraced.
National house prices have fallen more than 4 per cent from their peak levels in April, and the bank’s indicators point to sharp declines in both house prices and building approvals. Credit supply has also deteriorated sharply and mortgage serviceability will worsen over coming quarters as rates continue to rise, they said,
Morgan Stanley warned of further housing activity downside, with the current sharp price adjustment not yet matched by a fall-off in sales, building approvals and lending as seen in previous cycles.
The market is being held up by a higher share of short-term fixed rate mortgages, the construction backlog and negative equity buffers.
“These delay but don’t mitigate the economic impact of house price declines, creating more space for near-term RBA hikes but downside economic risk to 2023,” the bank said.
“The impact from lower house prices and higher rates should be felt next year, however, and we lower our GDP forecast further below consensus to 2.1 per cent,” it said.
“This downgrade is entirely driven by a much higher interest rate path assumption relative to when our prior forecast was set in May – although a stronger migration profile and expectations of further policy support do provide some offset.”
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