BlackRock Inc. says there’s a risk house prices in Australia will drop, hurting the part of the economy that’s been keeping the nation out of recession as mining investment slumps.
The residential property market in Sydney and Melbourne could slow, while home prices elsewhere may drop, said Stephen Miller, head of Australian fixed income at the world’s biggest fund manager.
With the nation facing “headwinds to growth,” the Reserve Bank of Australia will be forced to cut interest rates again and the currency will slide further, he said.
“Housing’s a key risk,” Miller said at a conference on Friday in Sydney. A weaker property market is “not good news for the consumer, it’s not good news for those of us looking for sources of activity growth outside of investment,” he said.
Australia’s economy has been slugged by the global plunge in commodity prices as well as the drop off in capital spending in the wake the mining investment boom.
While the RBA’s bid to stimulate demand with record-low rates has stoked home prices and prompted regulators to encourage lending curbs, there are signs of fatigue in the real-estate market.
The central bank said Friday the market could be starting to slow while rapid home construction in some areas is creating some oversupply.
Stricter bank capital requirements could also weigh on mortgage lending, providing an additional drag. In response to tighter rules, Westpac Banking Corp. this week announced that it would increase loan costs for both property investors and owner-occupiers.
The move, which may be followed by other major lenders, follows earlier landlord-focused increases aimed at assuaging regulator concerns about speculation.
“I’d characterise Australian housing as being in very fragile balance,” Miller said.
“The challenge for the RBA and the authorities has been to transition growth leadership from mining investment to other areas. Housing’s been important in that.”
The RBA said in its semiannual financial stability review on Friday that there are “tentative signs of some slowing in the Sydney and Melbourne housing markets. While the housing market remains a long way from oversupply nationwide, some geographic areas appear to be reaching that point, particularly the inner-city areas of Melbourne and Brisbane.”
Miller predicts the RBA will be forced to cut its benchmark rate at least one more time and could implement two reductions in the next year. The central bank has brought its benchmark down by 2.75 percentage points since late 2011 to an unprecedented 2 percent.
The swaps market is currently pricing in about an 85 percent chance the RBA rate will have lowered rates at least a quarter point by May, with about 50 percent odds they will have eased by half a point or more. The Australian dollar, which bought 73.02 U.S. cents as of 12:30 p.m. in Sydney, will also fall, according to Miller.
“We’re thinking something like 70 cents is fair value given current levels of rates and current levels of commodity prices, but think we’ll see something well into the 60s next year.”