Housing market not at risk of significant price fall, says analyst

by Julia Corderoy16 Oct 2015
Australian house prices will drop, according to the head of treasury at a non-major bank, but the market is not at risk of a significant downfall.

Speaking to Australian Broker, the head of treasury at ING Direct, Michael Witts said the housing market is likely to have peaked, however there is no risk of a bursting bubble and significant price drops.

“There is a supply side adjustment taking place in Sydney and Melbourne and in addition to a weakening of the demand side with investment being more selective or it being more expensive for investors to fund purchases,” Witts said. 

“So in the context of incremental supply and potentially decreased demand from investors, but at the same time potentially increased demand from immigration and previously discouraged buyers, any pullback on prices I don’t think will be significant.”

Earlier this week, a research note from Macquarie Bank’s wealth management division predicted property prices will fall by up to 7.5% over the next two years. Witts says this adjustment is likely, but it is not concerning.

“It will be more by way of rounding now, this speculation of around 5% to 10% movements – and I don't think that will cause the market any major dramas. I don’t think we are talking about a price bubble with prices sort of falling significantly or anything like that.”

When asked about the future of the cash rate, Witts told Australian Broker that he expects the cash rate to hold steady before beginning to rise this time next year.

“I would suggest [rates will rise] about this time next year, coming back to the fact that the export production phase coming through. Secondly, due to the flow on effect of the lower exchange rate — the current low exchange rate and potentially lower exchange rate,” he said.

“One thing people don't appreciate is that everyone is madly keen on what the iron ore prices are doing but tourism actually generates more export dollars than iron ore. It can be fairly immediate in that the Aussie [dollar] to US [dollar] is down 20% and the Aussie to Euro is down approximately 10%-15%. So I think this summer, for example, I think we could actually have a very, very strong tourism season.

However, the peak in the cash rate is unlikely to get as high as it has in previous cycles. 

“I think the peak in interest rates will not be as high as what they were previously. If we argue that 2% is an ‘artificially low rate’, I don't think you will see them much above 3% to 3.5% in terms of this cycle. It is very hard to say what a peak in rates is likely to be, but I don't think we are talking above 5%,” Witts told Australian Broker.