Australia’s housing boom has peaked, with the challenge now to pull off a `soft landing’, investment bank Morgan Stanley says as it predicts further interest rates cuts and a mini-budget stimulus.
While official interest rates remain at a record low two per cent, tightened lending standards are prompting a cooling-off period amid slower net migration, its analysts note in a research report.
“We are now calling the peak in the housing cycle, and expect further falls in auction clearance rates and house price momentum, with a negative impact on construction occurring over 2016,” the report said.
The analysts say the housing slowdown comes at an awkward time for the Australian economy as it transitions out of the mining boom.
“We believe recession risks are elevated as regulators attempt a difficult soft landing of the housing market amidst external and income challenges,” the report said.
“While we believe policymakers have meaningfully tightened credit conditions and are willing to sacrifice some growth to lessen the risk of a ‘crash’ down the track, the challenge is to pull off a ‘soft-landing’, as seen in 2003-04.
“ Morgan Stanley argues fiscal stimulus is necessary and the federal leadership spill could be a catalyst to unlock a major infrastructure stimulus.
It predicts new prime minister Malcolm Turnbull may use the mid-year economic forecast in December as a mini-budget with a new growth agenda, although Mr Turnbull on Monday said it was not something he had considered.
The investment bank believes Australia has about $80 billion of headroom under its triple-A credit rating and could allocate a good part of that to an infrastructure stimulus.
It also argues the RBA will need to cut rates by another 50 basis points by mid-2016 as the housing slowdown impacts on growth, predicting unemployment will rise to 6.8 per cent – from 6.2 per cent currently – and growth will likely miss its forecasts.
RBA governor Glenn Stevens last week said regulatory measures to curb growth in investment home loans are doing their job, and Morgan Stanley believes they will be effective in cooling the market.
Many lenders have hiked interest rates for investors and made it harder for them to get loans while cutting rates for owner occupiers in response to a crackdown by the financial regulator, which has set a 10 per cent `speed limit’ for investor property loan growth. CoreLogic RP Data on Tuesday said the Sydney housing market is at or slightly past its peak.