The cost of housing is again likely to dominate the domestic economy in 2018, but all the talk may be about the effect of prices falling, not rising.
Pressure from financial regulators to stem the flow of investment funds to the housing sector appears to have done its job, and new housing lending has shifted away from interest-only and other riskier types of lending.
House prices across the nation grew just 0.2% in the three months to December 2017 and investment bank Morgan Stanley says declining house prices will be a key theme this year.
The Reserve Bank of Australia (RBA) predicted as much in its Statement on Monetary Policy. “Dwelling investment looks to have peaked earlier than previously expected, and the pipeline of projects to be completed is now being worked down in some states,” it said.
“Dwelling investment is nonetheless expected to remain at a high level over the next couple of years, but not to contribute to overall economic growth.
“This implies that housing supply will continue to expand at an above-average rate, which would tend to weigh on housing prices and rents in some markets.”
Morgan Stanley said that “If this is a sustained slowdown – our caution towards banks, consumer and housing-linked sectors will prove warranted”.
“Our proprietary housing market indicator, MSHAUS, is now at its lowest point in its 28-year history, suggesting conditions will deteriorate further in 2018.”
Morgan Stanley’s housing market indicator points to weaker conditions
Feel the Stimulation
As an example of this movement, Sydney prices fell 1.3% in the three months to December, for annual growth of just 5%. That’s down significantly from the first quarter, when prices were growing at an annual pace of nearly 20%.
With the housing auction clearance rate across the capitals also in decline, “price will now play its part”, Morgan Stanley said. The clearance rate for the first week of December 2017 at 60.3 per cent was the lowest reading since late 2015, early 2016, according to CoreLogic.
“Post-summer sentiment and credit availability will be key to determining risk or opportunity” in housing, which will also affect the broader economy in 2018.
The RBA says its ‘stimulatory’ monetary policy – that is, keeping official interest rates at a historic low of 1.5% – has supported the economy and helped cut unemployment.
Of course, the other effect has been to pump up the housing market, pushing household debt higher and crimping household spending as more money is used to service debt. This has the effect of holding back growth in gross domestic product, since domestic consumption makes up 60% of the economy.
Housing is usually the biggest investment for most people, so falling house prices tend to bring down wealth and consumer confidence along with it.
Another interest rate move in 2018 will depend on a major world event, such as armed conflict or consecutive interest rate rises in the United States. The RBA says the cash rate at the current level is consistent with sustainable economic growth, which would support a gradual increase in inflation.