Housing hard landing or soft landing? CommSec Research - The Big Issues of 2018

This is the third year running that this topic has been included in the year’s Big Issues.

In 2015 we said: “the answer will be revealed over 2016.” In 2016 we were more circumspect saying “we believe that discussion will continue to swirl about what sort of landing the housing market will experience.”

And indeed the issue has continued to be debated. But arguably the longer that the issue is debated, the more likely that Australia’s buoyant housing markets, notably Sydney and Melbourne, will experience a soft landing.'

Certainly there are many parts of the country that have far different experiences. Perth and Darwin housing markets are going through corrections after mining and energy construction booms. Adelaide and Brisbane have generally seen steady conditions. However the significant apartment building in Brisbane has led to a very soft rental market. Interestingly though, demand for some accommodation like townhouses is strong and not being met by supply, supporting prices.

The Hobart housing market is firm, benefitting from an overflow of housing demand from Sydney and Melbourne. The issue is one of under-supply rather than over-supply. And the Canberra housing market remains healthy, due in part to the control of land supply by the ACT Government.

The Sydney housing market has certainly softened with a combination of cooling demand and the gradual completion of more homes, especially apartments. The auction clearance rate has eased to around 61 per cent, down from around 80 per cent a year ago. But population growth remains solid in Sydney and rental vacancy rates are still low. In Melbourne, the market remains solid, again supported by population growth.

A key factor that points to the potential for a “soft” landing rather than “hard” landing in markets such as Sydney and Melbourne has been the policy of lenders. Reflecting on the experience of housing over-supply in the US and Europe during the Global Financial Crisis, Australian lenders adopted a new policy. Before lenders would provide finance to developers they sought that around 100 per cent of properties be sold “off the plan” by developers. There is still scope for ‘indigestion’ in some markets with a lot of building going on, but less scope for a broader “hard landing”.

Craig James cited a number of big issues for 2018:

- US President Donald Trump 

- How long will inflation stay low?

- The disconnect between jobs and wages

- Housing: Hard landing or soft landing?

- Infrastructure

- The economic benefit of lower taxes

- Consumer Debt

- The 'slowdown' of the Chinese economy

Craig James is the chief economist at CommSec.