Barring a European banking collapse, house prices set to rise in 2012: SQM

Unless there is a large-scale European banking default, Australian property prices are likely to rise in 2012, says SQM Research managing director Louis Christopher.

Christopher says he is sticking with his “relatively bullish scenario regarding dwelling prices” provided there isn’t a credit squeeze in Australia brought on by Europe falling over.

“Europe is the key. The risk is clear and present. If Europe allows for large-scale banking defaults and a general credit squeeze, this will see our banks ration housing credit by requiring more conservative loan-to-value ratios.

“Of course, if the squeeze is large enough, banks could come up with additional ways to reduce their balance sheets.”

In a worst-case scenario banks would call in loans “simply because the loan-to-value ratios have risen too high due to drops in property prices”.

“No doubt [this would be] an event of the last resort with the bankers knowing full well that such a move could very well trigger very deep house price falls in this country, which would further destabilise their own balance sheets.” 

However, barring any such calamities Christopher expects the housing market to respond favourably to further rate cuts in 2012.

“From our regression modelling it appears that the market is very sensitive to interest rate changes. We have had this conviction concerning the markets from some time now.

“Yes, even a quarter-point change can move the markets and this is because buyers and owners are highly leveraged. Now that we have had a half point change, which has been passed on in full, there is a greater chance, in our opinion, that dwelling prices will rise,” he says.

According to Christopher, mortgage approvals, which increased in October without any interest rate cut stimulus, need to rise by about 3,000 per month to reach the 37,500 achieved in November 2010.

Source: SQM Research

“The red dot on the chart is the point where housing finance approvals need to get to in order to attain capital growth equating to inflation and naturally, meet our bullish scenario forecast for 2012. So clearly we are not there yet and we will need to reach the red dot by June next year in order for our bullish scenario to play out,” he says.




Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer


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