Wall Street bank's latest prediction is even grimmer than its previous forecast
Australian house prices will tumble a total of 20% from peak to trough, according to a new forecast from Morgan Stanley.
The Wall Street bank has revised its previous prediction of a 15% drop, agreeing with the increasing number of market watchers who are taking a dimmer view of the housing sector, The Australian reported.
Economists’ worries about the impact of a house price correction are growing as the equities market tanks and the wealth effect of falling asset prices stifles consumer confidence, the publication said.
A 20% fall would be the largest nominal price decline in at least half a century, at more than double the previous largest correction of 10% in 2017-19, Morgan Stanley said. The bank said that it would be comparable to the adjustment seen in the US during the Global Financial Crisis, when house prices tumbled by 19% between 2007 and 2012 – although Australia’s adjustment would come with much larger equity buffers and be a faster correction.
Morgan Stanley’s team, led by head of Australian strategy and economics Chris Nicol, also said that it now expected a higher Reserve Bank terminal rate of 3.6%.
“The RBA faces a tough balancing act between sharp adjustments in rate-sensitive sectors and a more entrenched inflation pulse; we think the recent shift to a higher global rates outlook will keep it hawkish in the near term, raising rates further above its neutral estimate,” the team said.
Morgan Stanley also predicted a stronger migration recovery, surpassing the pre-COVID run-rate next year, The Australian reported.
In the meantime, however, the bank predicted a sharp housing reversal, with the entire post-COVID boom to be retracted.
Read next: Home price pressures continue to increase
National house prices have plummeted more than 4% from their peak levels in April, according to The Australian. Morgan Stanley’s indicators point to further steep declines in both house prices and building approvals. Credit supply has also deteriorated badly, and mortgage serviceability will only get worse over the coming quarters as interest rates continue to climb, the bank said.
The current price falls are not yet matched by a drop-off in sales, building approvals and lending, as is historically the case for downturns. Those effects are being delayed by a higher share of short-term fixed mortgages, the construction backlog and negative equity buffers, Morgan Stanley said.
“These delay, but don’t mitigate, the economic impact of house price declines, creating more space for near-term RBA hikes but downside economic risk to 2023,” the bank said. “The impact from lower house prices and higher rates should be felt next year, however, and we lower our GDP forecast further below consensus to 2.1%.
“This downgrade is entirely driven by a much higher interest rate path assumption relative to when our prior forecast was set in May – although a stronger migration profile and expectations of further policy support do provide some offset,” Morgan Stanley said.
