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House price growth to slow further but not crash: UBS

Economists at investment bank UBS are increasingly confident a "correction" is taking place in residential construction, led by a slowdown in the apartment sector. But they argue house prices are set to grow more slowly, rather than drop, due to very low interest rates and growth in population.

Scott Haslem and George Tharenou cut their forecasts for dwelling commencements for this year and next in a report to clients last week, also arguing house price growth had been "unsustainable".

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After "calling the top" in housing activity in April, the economists said they had "increased confidence that a correction is unfolding" in building activity. They noted official figures that last week showed a 19 per cent year-on-year slump in dwelling unit commencements in the March quarter.

This was the largest fall since the global financial crisis, they said, and building approvals had also fallen 20 per cent in May, after a sharp fall in approvals for high-rise units.

Housing activity has been a key driver of economic growth in recent years, but they argue this effect will wane this year and next, with annualised commencements to fall from about 202,000 to 195,000 next year and 188,000 in 2018.

Even so, they are not forecasting a fall in house prices, despite viewing recent growth rates as "unsustainable".

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CoreLogic data released on Monday showed home values rose 1.4 per cent in Melbourne for a third straight week, 0.7 per cent in Sydney, and 0.2 per cent in Brisbane and Adelaide, while Perth's prices were steady.

The UBS note argued the annual rate of house price growth would slow further from a capital city average of about 10 per cent in the year to June, to 7 per cent by the end of this year. In 2018, they are forecasting house price growth between zero and 3 per cent.

"Under our base-case view of a 'correction but not a collapse', we see a 'muddle-through' outcome, which leaves the RBA holding the cash rate steady over the coming year," the report said.

A report from Deloitte Access Economics, published on Monday, also highlighted a slower pace of home building as a potential economic headwind, alongside softer growth in China. Even so, it added these was a "caveat" to an "otherwise solid outlook" for the economy.

"The pace of home building is set to shrink further amid increasing evidence that gravity may soon start to catch up with stupidity in housing markets," the Access report said.

"Relative to the rest of the rich world, Australia's economic outlook may not be quite as impressive as it once was, but we are still kicking goals."

Australia's economic outlook may not be quite as impressive as it once was, but we are still kicking goals.

Deloitte Access report

Despite signs of slowing in recent months, including softer price growth and declines in new lending to property investors, both Sydney and Melbourne reported auction clearance rates of about 70 per cent at the weekend.