Big Investment Firm Says Aussie House Prices Will Fall In…

Predictions of a house price collapse remain front page news.

We’ve stayed away from the subject for three years, but now even we can’t ignore it.

[Full disclosure: Your editor predicted a house price collapse in 2008 and 2009…and 2010! After house prices didn’t collapse, we gave the subject a wide berth.]

The big guns in finance are issuing stark warnings. And while in yesterday’s Money Morning we focused on trouble ‘out west’, the latest warning from a major global investment house has Melbourne and Sydney in the firing line.

Details below…

Predicting a house price crash is a favourite topic of many analysts — both Aussie and those from overseas.

It’s also a favourite topic of those who believe a crash won’t happen. So far, they’ve been right.

Their arguments may not amount to much. They usually involve some notion about Australia ‘being different’, or that Aussies love their houses more than folks overseas love their houses, or that Aussie house prices can’t fall because of the proximity to water.

We kid you not. We’ve seen all those excuses. And yet, despite that, they’ve been right. Aussie house prices haven’t fallen. But that hasn’t stopped people (including your editor) from predicting a catastrophic fall.

And now a big US investment firm is on the case.

Put 2018 in your calendar

Here’s what US investment firm Morgan Stanley has to say about the Aussie housing market:

We believe the growth contribution from the housing boom has already peaked and look for a plateau over 2017 and decline through 2018.

That won’t please the housing bulls. And it won’t please the Big Four Aussie banks, either. Most of their profits come from mortgages. And in order for the banks to keep making more and more money from mortgages, they need house prices to keep going up.

Why? Because the higher house prices go, the more buyers will need to pay and the bigger the mortgage they’ll need.

Plus, if house prices keep going up, it means those selling will receive enough to pay off their current mortgage, and hopefully (for the banks) it would encourage the sellers to ‘trade up’ to a bigger house and a new (and bigger) mortgage.

Apparently, that’s called the wealth effect. It should be called the debt effect, because it seems to rely on people going further into debt rather than actually growing their wealth. But that is, perhaps, another story for another day.

Today, we keep our sights on house prices.

According to a news report from Bloomberg:

A national housing oversupply of about 100,000 dwellings will develop by 2018, Morgan Stanley said, as a glut of apartment projects are completed, particularly in Sydney and Melbourne.

The housing slowdown, combined with a decline in mining investment, will ripple through the economy, putting 200,000 jobs at risk and pushing the unemployment rate up to 6.5 percent, Morgan Stanley said. This will prompt the central bank to resume cutting interest rates in the second half of next year, lowering the benchmark rate 50 basis points to a record low 1 percent.

There’s a lot going on in there — including falling interest rates. But whichever way you look at it, it’s not a promising sign.

Based on the reports of the Morgan Stanley research, there’s no indication how much the investment firm thinks house prices will fall by.

But in truth, it wouldn’t even require a big fall for it to have a negative effect on house prices and peoples’ willingness to buy property. One of the big drivers of the housing market is the belief that house prices always go up…and that if you don’t buy now, homes will be even more expensive next year.

So even if prices plateau, that would start to tear away at that argument.

It’s always controversial to predict a house price crash. But one day, we believe prices will crash in a big way. And when (or if) they do, it will cause severe financial trouble for a lot of people.

Naturally, the big overseas investment firms have been wrong in the past. And so have the big hedge funds that have betted against Aussie housing for years.

One day, they and we will be right, and prices will fall. Trouble is, there’s no way of knowing for sure if they’ve got the right timeline. Not yet, anyway.


Kris Sayce
Publisher, Money Morning

PS: On a sidenote, Morgan Stanley says interest rates are set to fall further too. We’ll back them on that. In fact, the prospect of lower interest rates is sure to be a hot topic at next week’s investment conference. Knowing where interest rates are going is a must for investors. To find out how you can hear Jim Rogers’ and Jim Rickards’ views on Aussie interest rates, go here.

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

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