House price growth to slow to 1% then recover

The slowdown is unlikely to persist, as the model forecasts growth will accelerate to 4 per cent in 2019. Significantly, we do not foresee a nationwide decline in dwelling prices in the next two years, although individual cities may see annual falls.

“The model forecasts growth will accelerate to 4 per cent in 2019.”

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The model provides an additional tool for determining ANZ’s views about the housing market. The forecasts it produces are consistent with the views we published in previous research notes.

The main risk to this forecast is from interest rate movements. If wage growth disappoints again, it is unlikely the Reserve Bank of Australia will have enough confidence in the economy to hike rates.

In this case, we would expect dwelling prices to rise by more than the model predicts, because of the reduced interest rate drag.

Slowdown

The second half of 2017 saw an easing in housing price growth in Australia, compared with the first half of the year in which Sydney and Melbourne had pushed national growth rates into double digits.

Tighter macroprudential regulations were the primary cause of the slowdown, further dampened by soft wage growth.

There are a couple of leading indicators which provide information about likely changes in house prices in the short term: auction clearance rates and the credit impulse. The auction clearance rate has stabilised in recent months, suggesting the worst of the recent slowdown in price growth may be over.

While these indicators provide leading information about house prices, they are only useful over a matter of months. To accurately forecast housing prices over a longer-term, we needed a different approach.

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We developed a model which predicts house prices over the long term using population growth while forecasting short-term price movements using other factors, including economic variables.

The advantage of this approach is it is simple and captures the main dynamics of housing price movements and makes the link between prices and economic conditions explicit.  The economic inputs we used in the model were: dwelling investment; mortgage interest rates, and gross total incomes.

We tested the model’s accuracy by producing two-year forecasts on a rolling basis from 1995 to 2017 and comparing them to actual prices.

Using our forecasts for the relevant input variables over the next two years, the model predicts housing price growth will continue to slow in the near term, bottoming out at 0.8 per cent in the second quarter and gradually picking up thereafter. 

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We found changes in the lending rate to be the largest drag on prices in 2018, particularly in the second half of the year. Underlying this is our expectation the RBA will hike its policy rate twice in 2018, pushing up mortgage rates.

The impetus for these rate hikes is our expectation GDP growth will accelerate to around 3 per cent and the unemployment rate will edge lower, which will prompt the RBA to take the real cash rate out of negative territory.

Jack Chambers is an economist and David Plank is Head of Australian Economics at ANZ