Housing starts to fall 18.4% in 2012: Deutsche Bank

A new research note from Deutsche Bank has expressed a number of concerns about the Australian housing market, and has forecast an 18.4% decline in housing starts during the 2012 financial year, based on an assumption interest rates will fall by 50 basis points.

The note come just as the International Monetary Fund has released its own report, claiming that despite the enviable status of the Australian economy it is under threat from a housing market that could be as much as 15% over valued.

DB analyst Emily Behncke wrote in the note that if the RBA cuts interest rates by 50 basis points over the next year, and the world economy does not fall back into recession, housing starts may fall 18.4% in the 2012 financial year.

The news comes as the construction industry is continuing to suffer, with many SMEs collapsing as work dries up.

Behncke highlights that Brickworks, Boral and CSR have all downgraded their forecasts for housing starts by about 10%, and that housing prices remained most flat in the year to June 2011, and that the average median house price is seven times the average family income, although this has fallen slightly from last year.

"We believe our forecasts are at the lower end of the consensus range based on a combination of forecasts, (BIS, HIA), which forecast an average rate of 145,100 and 162,700 in 2011-12 and 2012-13 respectively."

"Hence, DB forecasts for 2011-12, and 2012-13 dwelling starts are -12.3% and -14.1% respectively below average forecasts by BIS and HIA."

There will also be a shift in the types of houses developed. There will be an increase in the number of multi-level apartment buildings, with construction already taking up 38% of total building starts, despite the historical average set at 30%.

There is also a shift from investors and first home buyers to upgraders, who will move up to bigger and better homes, the note states. The value of loans from investors has fallen 8.1% in the past year.

"Given first home buyers have also withdrawn from the market – currently at 15.2% of housing finance – the only strong sector is the move-up buyer."

"Annualised move-up buyers have increased 1.9% month-on-month and 15.1% year-on-year in July 2011."

The note explains the after tax cost of maintaining investment properties based on current median house prices on average rents was 2.3% of the purchase price in the June quarter, equivalent to 2006 levels.

"We note the investment property equation is most expensive in Victoria (2.6%) in June 2011. As a result, we are not surprised that investor finance figures show a reduction to investor participation of -1.1% month-on-month and -8.1% year-on-year in July 2011."

And while the note observes housing prices haven't actually fallen, they could do so over the next year. But it also suggests that the RBA may cut interest rates by 25 basis points in the first quarter of 2012, which would potentially offset any falls.

"Affordability declined for all states in comparison to the historical average basis in QJ11 (however, improved marginally in three states on a quarter-by-quarter basis)."

"Cash rate has risen 175 basis points since September 2009. Given our expectation the cash rate will decline 50 basis points in the next 12 months, we would expect affordability to improve."

It also notes that as long as clearance rates remain above 50%, prices are excepted to remain stable.