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The Commonwealth Bank thinks the downturn in Australian home prices will now be larger than it previously thought.

It says weaker growth in housing credit and deteriorating sentiment towards the outlook for prices are the main factors behind the downward revision.

The largest price declines are likely to occur in Sydney and Melbourne. A mixed performance is expected across the smaller capitals.

It says there are both downside and upside risks to its forecasts. One of the downside risks is Labor’s proposed changes on the tax treatment of housing.

While there is the potential for larger price falls, it says there’s two factors that should prevent a price crash.

The Commonwealth Bank, Australia’s largest home loan lender, thinks the downturn in Australian home prices will now be larger than it previously thought.

Like many other forecasters, it expects the deepest falls will be seen in Sydney and Melbourne, those capital city markets that saw prices increase the most in the subsequent price upswing.

“We have downwardly-revised our forecasts for dwelling prices over 2019,” says Gareth Aird, Senior Economist at the CBA.

“This is largely due to credit growth falling by more than we had previously been anticipating and sentiment towards housing from an asset price perspective falling solidly.”

Aird days the latter factor — sentiment as to what will happen next — is difficult to forecast given it involves trying to measure the views of millions of Australian households.

“However, he says believes it could potentially play an even bigger role than credit in determining just how far prices will fall.

“Sentiment is hard to forecast but has a big impact on prices because the relationship becomes self-fulfilling,” he says.

“That is, if households expect prices to weaken then demand for credit falls and prices will continue to correct lower. We believe that we are in that part of the cycle now.”

In Westpac Bank’s latest Consumer Sentiment Survey for January, views on the outlook for home prices were the most pessimistic they’ve been since the question was first asked in 2009.

So if so many people think that prices will continue to weaken, as Aird points out, it could see prospective buyers hold off purchasing in hope of even cheaper prices.

Based on the modeling conducted by the CBA, and its fundamental views, it sees prices falling at a faster pace this year, although slower than in 2018.

“Our base case for property prices has them down by 5% in Sydney over 2019 and 6% in Melbourne,” Aird says.

“That would take the fall in Sydney prices from its July 2017 peak to around 15%. For Melbourne, prices would be down by around 13% from their November 2017 peak.”

In the smaller capitals, the CBA sees prices in Brisbane and Perth “easing a little over 2019” while those in Adelaide and Hobart are expected to post “modest rises”.

“Nationally, we think prices will end the year down by around 6%,” Aird says. “That would take the total peak–to-trough nationally to 12%.”

CBA

As for risks to this view, Aird says the prospect for lower mortgage rates, courtesy of a prospective RBA rate cut, or two, has the potential to see price falls slow more than the bank’s baseline forecast.

“If the RBA was to loosen monetary policy this year as a preemptive strike against a downturn in the labour market then it would likely result in dwelling prices not correcting by us much as we anticipate,” he says.

Likewise, he believes the potential for larger first home owners grants, or stamp duty concessions, could also help to underpin prices.

“Any policy change to boost housing demand such as first home owner grants or lower stamp duty is an upside risk to our base case,” he says.

As for the downside risks — something many appear to be focusing on given the recent scale of price decline in Sydney and Melbourne — Aird nominates three key factors to watch out for: higher interest rates, be it due to RBA rate hikes of out-of-cycle rate increases from Australia’s major lenders, a reduction in Australia’s migration intake and potential changes to the tax treatment of housing should Labor, as the polls suggest, win the upcoming federal election.

“A change in the taxation treatment around housing, as proposed by the Labor party, would result in dwelling prices falling by more than would otherwise be the case,” he says.

On the first downside risk, higher mortgage rates, the CBA doesn’t see the RBA cash rate lifting until the final quarter of next year.

In terms of Australia’s migration intake, Aird says there’s a risk that one of the major parties may opt for a different policy stance on the level of immigration.

While these factors could see prices fall more than he and other forecasters currently expect, especially if more than one comes to fruition, Aird doesn’t believe the market is heading for a crash where national prices fall by more than 20%.

“In our view that would require a meaningful lift in the unemployment rate or materially higher interest rates,” he says.

“While that is possible, we have neither outcome in our central scenario.

“Both the unemployment rate and the cash rate are expected to remain low. Indeed, the recent shift in stance from the RBA implies a roughly equal chance that the next move in the cash rate is down or up.”

An expectation that population growth will continue to hum along at a decent clip, along with a sharp pullback in building approvals late last year that points to a reduction in new supply over the medium-to-longer term, are other factors Aird nominates as factors that should ensure the downturn doesn’t turn into a crash.

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