Housing heartbreak is on the way

Housing heartbreak is on the way

AUSTRALIA’S housing cycle has “peaked” and new construction will decline over the next two years, with a crash in prices leading to a possible recession, a new report has warned.

In a note on Friday, investment firm Credit Lyonnais Securities Asia (CLSA) said issues of affordability and household debt were “overextending Australia’s real estate bubble, which is being held aloft by foreign capital”.

With tightening bank lending standards the likely catalyst for a correction, CLSA’s base case is for the “crisis” to start with cheap apartments and later spread to other flats in proximity.

“This is likely to lead to defaults among small developers and a sharp contraction in apartment construction,” CLSA said.

“However, it is unlikely to result in sharp price declines in other regions. Our worst-case scenario would result in dwelling prices falling sharply in all areas, eventually leading to a recession.

“Our forecast is based on a scenario where over the next few years, we will see a number of apartment buildings struggle to achieve reasonable levels of settlement, leading some small, private developers into receivership.

“This will expand into surrounding apartment buildings. While we believe that there will be limited settlement risk on high quality flats, it will result in a sharp slowdown in new apartment developments. Single-family housing will experience a more modest slowdown, in line with previous cycles.”

CLSA said construction would follow prices, so it expects apartment building to be hardest hit over the next five years.

“Our worst-case scenario would see falling apartment prices in specific areas, expanding into other regions and impacting house prices,” CLSA said.

Household debt of 122 per cent of GDP and house price-to-income ratios of up to 12 times increases the risk, the firm warned.

“We would expect housing construction to follow prices, resulting in lower employment; it is particularly problematic if we see a sharp reduction in the building of single-family houses,” the firm states.

“And falling house prices will also affect GDP via the so called wealth effect, where consumers spend less when house prices fall. This scenario would result in dwelling prices falling sharply in all areas, eventually leading to a recession.”

In February, CLSA cut its apartment forecasts due to concerns around ongoing bank tightening and China’s crackdown on foreign capital outflows.

“The squeeze from lenders continues, albeit recent actions indicate it is highly targeted towards foreign investors and apartment-focused lending,” CLSA said.

“Regulation aimed at foreign buyers (and we expect more to come) will also create an impact. While there has been an official crackdown on capital leaving China, it appears to be less of a constraint than we thought 12 months ago.”

Commonwealth Bank and developers Lend Lease and Mirvac Group would be most affected by the downturn, with the other three big banks and construction firms including Boral, CSR and Stockland less exposed.

frank.chung@news.com.au