The possibility of a housing bubble in the next 12 months is slim, according to Citibank (Citi) research published yesterday.
Whilst some economists have predicted house price increases based on auction clearing rates, Citi’s research shows that once global factors and debt constraints are taken into account, house prices are unlikely to rise significantly.
“Our model suggests that house price inflation may peak at around 3% by March 2014 and prices could fall slightly thereafter,” say Citi spokesmen Paul Brennan and Joshua Williamson.
“[The research] looks at the impact of Chinese immigration, a falling dollar, rate cuts and a number of other scenarios. Overall it says that a housing market ‘bubble’ is not likely to eventuate over our forecast horizon even under the most optimistic assumptions.”
Brennan and Williamson say that, with the cash rate at record low levels, some forecasts are for prices to rise sharply creating financial stability risks.
“Forecasters point to auction clearances that have surged this year, which normally is a precursor to rising real house prices. House prices are already rising rapidly in New Zealand, where the rate cutting cycle is more mature than in Australia. [But] our research suggests these risks are overblown. A house price model developed by our colleague, Vivian Jiang, shows that once global factors and debt constraints are taken into account, house prices are unlikely to rise significantly. The modelling shows that Chinese immigration has a powerful effect on house prices, as do Chinese economic growth and the AUD.”
Looking ahead, the two say the slowdown in Chinese growth and fall in Chinese immigration into Australia, the lower AUD and the limited appetite for further increases in loan size counter the favourable effect on house prices of low interest rates.
“Assuming no further rate cut, the model suggests that house price inflation may peak at around 3% by March 2014 and prices could fall slightly thereafter.”
However, in the longer term, Brennan and Williamson say there are potential downsides to the Australian housing market.
“These include the lower growth outlook in China, slowdown of Chinese immigration and reduced appetite for offshore capital inflows associated with the lower AUD as the mining boom winds down.”
“We expect the nominal house price to peak in March 2014, by which time it will have increased by 3% from its current level. However, we expect the slowdown in China to flow through to the Australian housing market during 2014, causing downward pressure on house prices.”