House prices to rise a further 3% to March 2014 and then fall around 2% under China effect: Citi Research

House prices to rise a further 3% to March 2014 and then fall around 2% under China effect: Citi Research
House prices to rise a further 3% to March 2014 and then fall around 2% under China effect: Citi Research

Australian house prices are expected to rise a further 3% between now and March 2014 and then “fall slightly thereafter” by around 2% according to forecasts by Citi Research.

With RP Data calculating that house prices have risen just 2.9% since bottoming out in May last year, this would mean around a 6% gain in house prices following 200 basis points being cut from the cash rate since November 2011.

It would be by far the weakest recovery in house prices compared with previous interest-rate easing cycles.

house_price_scenarios

Following rate cuts commencing in July 1996, house prices gained 13% over the following 18 months, they gained 30% following rate cuts commencing in February 2001, and lifted 11% following the big rate cuts that occurred from September 2008 onwards noted AMP Capital Investors chief economist Shane Oliver in May.

The primary drivers of a correction after March 2014 is a slowdown in the Chinese economy and less Chinese migration into Australia, both of which have been identified as having a strong correlation – albeit with around a three year lag time – with Australian house price movements.

chinese_and_house_prices

This forecasts assumes that interest rates remain unchanged over this period and is calculated using a complex forecast model that factors in year-on-year changes in nominal house price, Chinese immigration, variable interest rates, Chinese industrial production, changes in the real trade weighted index, the non-FHBs average loan and consumer confidence.

“Our baseline model shows the nominal house price will continue to grow until March 2014,” say Citi Research analysts Paul Brennan and Josh Williamson.

“The initial house price increase is the result of sustained low interest rates which in turn causes increased borrowing.

“However, the downward pressures created by a slowdown of the Chinese economy, lesser appetite for capital inflows as reflected in a lower Australian dollar and reduced Chinese immigration will eventually overtake the upward momentum from positive domestic factors, causing prices to fall slightly.”

In the short term, the main driver for the Australian housing market will be the low interest rate, which is expected to remain at low levels for "the foreseeable future".

“We maintain our view that the official cash rate will remain at 2.75% until the second quarter of 2014," say Brennan and Williamson.

“This implies that the variable lending rate will also stay at current levels over the same period, easing households’ (particularly non-first home buyers’) concerns over mortgage pressures and consequently stimulating the demand for housing.

“We also assume consumer confidence rises gradually later this year.

“We have allowed for the non-FHB loan size to grow at higher than the historical average rates, which we think is reasonable in response to the record-low cash rate.

“The auction clearance rates in Sydney and Melbourne have been hitting the 70% to 80% mark for the first 5 months of 2013, coinciding with the RBA cutting rates to lows of 3% in December 2012 and again to 2.75% in April this year.

However, the lag factor of lower Chinese immigration growth since 2011-12 will add further downward pressures on house prices.

In addition, Citi's Chinese economists are of the view that "Chinese industrial production (IP) growth will moderate to below 10% over our forecast period, a significant reduction from the double digit growth rates seen not too long ago".

“The falling Australian dollar against major trading currencies, particularly the US dollar also points to weakening offshore investor interest in the form of reduced capital inflow appetite.

“We are of the view that the trade weighted index (TWI) - an average of the Australian dollar exchange rate compared with its most important trading partners - will continue to fall over our forecast horizon, suppressing house price growth.

Larry Schlesinger

Larry Schlesinger

Larry Schlesinger was a property writer at Property Observer

Comments

Be the first one to comment on this article
What would you like to say about this project?