A major analyst is tipping a slide of up to 20 per cent in property prices, but it won’t be even across the country.
EVERYONE knows property prices are falling under the weight of rising interest rates, but what they really want to know is when will prices hit bottom, and the answer to that question is probably not be for another 15 months.
The fall might end sooner, or take longer, because that 15-month estimate is based on the research of Morgan Stanley, one of the world’s leading investment banks, and not a real estate agency trying to drum up business.
The bank’s research, titled Housing Correction – Cycle Test, started with an analysis of the six most significant house price downturns over the past 40 years, which found that across the country the average fall was 6.4 per cent and the decline lasted an average of 16 months.
This time the fall is expected to be a record 20 per cent from peak to trough, roughly double the previous worst drop of 10.2 per cent over 21 months, running from late 2017 to early 2019.
Assuming the current downturn started in April, then the property market is already about six months into the correction and, if it matches the record of 21 months of decline, then a bottom can be expected towards the end of next year.
Property prices in Sydney and Melbourne dominate the bank’s calculations going up and coming down with both set to outperform in the current correction because households in those cities have bigger mortgages and are feeling more pain from rising interest rates.
The key point from the bank’s analysis is that the forecast 20 per cent fall “will easily be the largest in recent history”.
“Expect larger price declines in Sydney in detached housing while Melbourne apartments will be more resilient,” the bank said.
A graphic comparison of past down legs in the property cycle shows that this year’s decline has had a fast start, with the fall picking up speed with each increase in rates.
“House price declines have accelerated, and we now expect the entirety of the post-COVID boom to be retraced (down 20 per cent nationally),” Morgan Stanley said.
“A higher Reserve Bank terminal (peak) interest rate is the key driver, with migration a partial offset. “Each of the prior four house price downturns were ended only when the Reserve Bank pivoted to rate cuts.”
Complicating house price estimates is the effect of inflation, with the last period of high inflation, which ran from the late 1970s into the 1980s, producing a conflicting picture.
Back then, real house prices (after allowing for inflation) were “deeply negative though nominal prices still increased throughout the period”, the bank said.
History appears to be repeating.
ABC of debt
FROM CDO to LDI, the alphabet soup of economic labels cannot hide the fact that every recent downturn had debt at its roots.
In 2008 the crisis started with the invention of the collateralised debt obligation (CDO), which bundled mortgages into a single financial instrument in the belief that a few bad loans would be offset by all the well-serviced loans.
A theory which failed.
Now it’s the liability driven investment (LDI) strategy, under which British pension funds try to match future liabilities with current assets (a theory that required trading in high-risk financial market derivatives).
It too is failing after almost breaking the Bank of England.
What comes next is anybody’s guess, but there’s a fair chance another ‘clever’ investment strategy devised when interest rates were low will unravel as rates continue to rise.
Don’t bank on it
THE Optus data leak has banks worried, as it should, because they have undoubtedly placed a lot of faith in the belief that the internet is a safe place for financial transactions, which it generally is – except when it is not.
But what’s also clear is that banks are a little uncertain about who’s responsible for protecting a customer’s money.
Commonwealth Bank, in a recent note emphasised the bank’s role:
“Protecting you is our priority. Stay CommBank safe.”
Westpac put more of the responsibility on the customer:
“Protect yourself from fraud and scams.”
Which leads to a tricky question.
Who is ultimately responsible for protecting a customer’s money in a bank – the bank or the customer?
On the road again
GOOD news for car buyers; the global trade blockage that led to big COVID-caused shipping delays is coming to an end, which means more new cars could soon arrive in Australia.
The bad news is that the improvement in shipping movements is largely a result of a slowing international economy ahead of what is expected to be a worldwide recession next year.
There might well be more cars, but fewer people who can afford them.