Morgan Stanley shows house prices will continue to tumble

House prices in Australia have now been falling for nine consecutive months, and Morgan Stanley recently said that its modeling shows this trend set to continue.

The US investment bank has based its estimation on its predictive housing model, known as MSHAUS. The downturn follows a strong upward cycle late in 2016.

The Australian housing market fell to a post-upswing record low in June, suggesting that the downside will continue at least into 2019.

Morgan Stanley stated: “We find MSHAUS has dropped to a new low of -1.0, suggesting that the recent decline in prices will likely continue into the first quarter of 2019. All categories of the indicator remain at weak levels, but credit supply was once again the main driver of the fall, as regulatory scrutiny continues to tighten amidst the ongoing Royal Commission into Financial Services and legal challenges to responsible lending practices.”

The commentary from Morgan Stanley revealed that the lending situation is largely to blame, pointing to increased difficulty for borrowers to secure interest-only housing loans and tighter lending standards driven by a downward spiral of falling prices and diminishing real estate investment return predictions.

Another factor in the downswing is the increase in new housing coming onto the market, particularly in the major cities. This increase came about specifically to cool the housing market and make it easier for first-time buyers to enter the market. When factoring the new housing supply into Morgan Stanley’s model, further reasons for the downturn become clear.

The Australian Prudential Regulation Authority, the country’s banking regulatory body, has suggested that the tightening of borrowing standards is nearing completion, and the lending supply pipeline is looking strong. However, these factors did not prevent Morgan Stanley from saying that there is no floor for prices anytime soon.

Morgan Stanley said: “National and Sydney dwelling prices are down about 2.3% and 4.8% from their peak respectively, and auction clearance rates are tracking around 50%. At this stage, we remain of the view that a price adjustment will be [around] 10% while noting that deeper falls would bring a monetary or prudential policy adjustment into the debate.”

The investment bank added that its MSHAUS model has, in the past, given accurate predictions for the coming three quarters when it comes to building approvals. However, it believes that approval levels are actually higher than the number of buildings set to undergo construction due to more multi-dwelling permits being available.

“While total approvals have proven resilient over the year, holding 217,000 per annum in May 2018 in trend terms, we expect construction activity to continue declining, particularly in the apartment segment,” Morgan Stanley said.

National Australia Bank also predicts a continuation in the downward trend, slashing its price predictions for the next few years on Thursday. Earlier this month, Deloitte’s annual Mortgage Report made similar predictions for the rest of 2018. These negative sentiments reflect the situation in Australia’s two largest cities, Sydney and Melbourne.