Are Australian House Prices Really Going to Drop by Half?

That’s what some people might have been asking when hedge fund manager Jonathan Tepper came out last month and predicted Sydney and Melbourne house prices would soon plunge 50%. According to Tepper, Australia’s housing bubble is the biggest in history, and will soon pop.

By the bye, he also predicted that the Australian dollar would slump to US40c. That prediction is also looking a little shaky.

But a report released last week from the ANZ bank runs counter to Tepper’s predictions, and gives further support for Australian house prices to hold steady this year.

The report states that almost a decade of under-building has caused a housing shortage to the tune of 250,000 dwellings, and housing construction is still years away from meeting underlying demand.

And the shortfall is expected to remain above 200,000 beyond 2018. See the chart below from the report.

Source: Tradingview.com, Resource Speculator

Click to enlarge

The authors of the report, Cannington and Fabo, suggest that the underlying housing market shortage does provide some support for Aussie house prices, which should remain stable in the absence of deterioration in household incomes.

In other words, unless there is a sharp rise in unemployment, house prices should continue to find support as long as there is this unmet demand.

New home approvals reached a record annualised rate of 220,000 last year, and the country is expected to start work on about 200,000 more homes this year.

The shortage of housing is especially chronic in Sydney, co-author of the report David Cannington said,

On current construction levels in NSW, and if there were no additions to the underlying requirement for households, then you’d still be building for three years before NSW was in balance.’

It’s hard to dismiss this report, because the charts are telling you that there is something to the report.

Several construction companies are punching around all time highs, one such company is Adelaide Brighton [ASX:ABC]. Last month they posted a record profit of $208 million, up 20% on the previous year.

The company is struggling to supply enough concrete to meet the housing market demand.

CEO Martin Brydon told The Sydney Morning Herald,

There is no question that demand is very strong at the moment. In the last couple of weeks at the cement level there has actually been capacity constraints. There is no spare capacity in the market.’

Residential can’t continue to go at the same pace. You would expect it to ease. But that is a good thing because of the amount of infrastructure work about to come.’

It’s a similar story with Brickworks Ltd [ASX:BKW]. Likewise the company is struggling to meet the demand to supply new homes.

The company reported a record first half profit of $75 million last week, up 19% on the prior period.

Managing director Lindsay Partridge told The Sydney Morning Herald,

Every plant we have on the east coast is at capacity even after bringing bricks in from South Australia, Western Australia and Spain.’

Your takeaway on Aussie house prices

So will the value of my house really drop by half this year? The simple answer is, whilst there is this unmet demand, it is most unlikely.

For Australian house prices to plunge this year as per Tepper’s predictions, we need to see:

  • A strong upsurge in unemployment. Presently the rate remains steady and is not looking likely to blow out this year.
  • Significantly higher interest rates. That also looks unlikely for this year. Interest rates are another aspect to consider when you compare house prices relative to incomes. Homebuyers don’t look at the price so much, but whether they can afford the repayments. Low interest rates have increased home borrowers capacity to pay for higher prices.
  • Loosening lending. The Australian Prudential Regulation Authority has strengthened lending policies over the last 18 months, and recent data from the RBA suggests borrowers are not particularly stretched.
  • An oversupply of properties with no one wanting to buy them. The recent ANZ report suggests the Australian housing market is far from being over supplied.

Every other week a fund manager or financial pundit is calling an Australian property collapse, and the media give it extensive coverage. The tragedy is it causes many to sit on the sidelines frozen in fear.

Meanwhile, if you know the real estate cycle, you can with some confidence buy the right type of property, whether you are a homebuyer or investor, whilst everyone else is frozen into inaction.

To gain that sort of confidence, to know where property is headed and how to profit from it all, go here.

Regards,

Lead Researcher, Cycles, Trends and Forecasts

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Terence Duffy is an analyst and chartist, specialising in researching economic trends and cycles.  His primary focus is housing and land affordability. But you can also depend on him to offer his unique analysis of stock market charts. As Terence will show you, the charts often forecast, well in advance, the good or bad news to come — which he details in Cycles, Trends & Forecasts.


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