House prices are surging as buyers become more confident that the impact of covid will be managed. But there is likely to be some form of tightening to slow the boom, according to Morgan Stanley.
“National house price growth moderates further in July, but is still annualising ~20%. Continued lockdowns will impact but greater focus is on timing and scope of eventual macro- prudential tightening as the more meaningful headwind to come.”
MS says national house prices increased 1.6% in July, a continuation of the very strong pace of growth seen over 2021 with prices up 13.9% so far this year. While monthly growth slowed, it still remains elevated - in the 97th percentile of growth rates over the past 30 years.
“Detached house price growth (1.8%M, 17.9%Y) continues to significantly outpace apartment prices (1.1%M, 7.3%Y). Regional price growth was similar to the capital city average in the month (1.7%M) but is still stronger in annual terms (19.6%Y).”
The lockdowns have had a limited effect so far. MS says .price growth slowed in line with the national average, but still remains the strongest out of the major cities (2.0%M).
“Housing debt growth looks likely to continue accelerating on the back of higher prices, and we expect it will ultimately see a macro-prudential intervention. Clearances have held above 70% (but down from >80% earlier in the year).”
MS’s forward housing indicator is still below its long-run average but has improved with very attractive serviceability offsetting a potential overbuild from closed borders. Current rates imply a ~40% increase in household sector debt servicing capacity, which we expect will drive further upside in Credit Supply and suggests scope for continued housing price strength over 2021.
“Some tailwinds are reducing, with housing-specific stimulus measures rolling off and fixed mortgage rates rising somewhat, but we see these as only incremental headwinds at this stage.”
MS believes a policy response is coming. “Policy tightening is coming in our opinion, as a response to the price signals being sent by the current housing cycle - and while action here is likely to be incremental initially, recent commentary suggests regulators are moving closer to action (Australia Macro Matters: Shifting Signals on Housing Risks, 30 Jun 2021).
“We see Macro-prudential policies as the most likely first option for regulators, and even with lockdowns driving further fiscal stimulus, could still come later this year. Rate hikes represent a more meaningful challenge to the housing market, but we still see these as not likely until 2Q23.”
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