Housing Downturn Is Nearing End, 3pc Left to Fall

With cash rate cuts well and truly priced in and a widely-reported improvement in sentiment, Australia’s housing market is looking like it may bottom out earlier than expected.

While a quick return to boom-time conditions is unlikely, there are tentative signs the slump is abating.

Macroeconomic research group Capital Economics has forecast that the housing downturn may soon come to an end.

The combination of “more supportive” policy settings, curtailed development supply and indicators such as improving auction clearance rates are consistent with improving house prices.

“We now think that house prices will fall by only 3 per cent from current levels [or] 13 per cent from their peak,” Capital Economics senior economist Marcel Thieliant said.

“If the RBA keeps cutting interest rates, buying a house will soon be the cheapest since the global financial crisis across the country.”

The magnitude of house prices falls is also a factor — the current housing downturn is larger than the previous nine — which means that house prices aren’t as overvalued and affordability has improved.

“Across the country, houses are broadly fairly valued,” Thieliant said.

“They are overvalued by around 10 to 15 per cent in Sydney and Melbourne but may be a little undervalued in Perth, Brisbane and Adelaide.

“The sharp fall in prices in recent years has made houses more affordable.”

While tighter lending conditions and subdued wages growth may restrain prices from rebounding too quickly, Capital Economics is forecasting house prices to rise by 3 per cent from their trough by the end of 2020 and another 5 per cent in 2021.

“New housing supply has dried up and the regulatory authority has indicated that it will loosen lending restrictions.

“Housing supply will soon no longer exceed demand. By the end of this year, new housing supply may fall below 45,000 per quarter.

That would be equivalent to 190,000 homes built per annum — broadly in line with demand.