Doomsayers are rushing in to herald the end of Australia’s housing boom, but the picture looks positive and the construction cycle is below its peak, Deutsche Bank says.
The flames of a speculative peak in the housing market were fanned this week after auction clearance rates in Sydney, the epicentre of the boom, slipped to their lowest level in three years, while the latest Domain house price data shows prices in the harbour city were growing at half the rate they were just three months ago.
“There are now understandable concerns that house prices are too high, and that a slowing is in prospect,” Deutsche Bank equity analyst Tim Baker wrote in a client note.
Falling auction clearance rates, which dropped in Sydney to 67 per cent last weekend compared to 72 per cent the previous year, was evidence of a slowing rather than outright falls, Mr Baker said.
Historically, tumbling house prices are uncommon in Australia. Periods of large growth have been followed by years of sideways price action, he said.
“We are not certain why this time should be different. It’s true that debt levels are very high compared to history, but the interest burden isn’t,” Mr Baker said.
He said the construction cycle, which had a bigger influence on the economy, jobs and company earnings, had moved with price in the past decade, but that was not the historical trend.
“Record housing starts are cited as a warning sign, but relative to population (also at a record level) they’re below previous peaks,” Mr Baker said.
Construction needed to pick up by 20 per cent to approach historic peaks, and said poor affordability among renters was evidence of an “underbuild”.
On the equity market, investors seemed to be pricing in a fall, meaning that housing sector-exposed stocks were now trading at a 5 to 10 per cent price-earnings discount to the market.
This is the largest discount in four years, despite the companies, which include Boral, Stockland, Fletcher Building and Harvey Norman offering above-market earnings-per-share growth.
“While housing-related growth can’t continue forever, we’d prefer to back the momentum, and flag the possibility for commercial construction (now at depressed levels) to improve as housing comes off the boil,” Mr Baker said.
Deutsche Bank’s analysis comes amid a chorus of investment banks suggesting house prices are set for a fall.
Among the most bearish was Macquarie Group which said it expected a 7.5 per cent fall in prices beginning in March.
Credit Suisse noted house buying conditions had “deteriorated sharply” and said buying a property was now riskier than shares, while Morgan Stanley said the housing had peaked, increasing the risks of a recession in Australia.
The latest Domain House Price Report released this week declared Sydney’s house price boom was over, with the growth in median house prices slowing to 3.2 per cent in the September quarter, well down on the 7.7 per cent increase in the June quarter.
“The great Sydney house price boom has ended, with house price growth tracking back sharply over the September quarter,” Domain, which is owned by Fairfax Media, said.
But the board minutes for the Reserve Bank of Australia October meeting revealed the central bank was more sanguine about the housing sector.
“It was too early to be confident that these signs of slowing in housing price inflation would be sustained,” it said.