HSBC tips a modest recovery in Australian home prices next year

• HSBC, like an increasing number of forecasters, is becoming more optimistic about the outlook for Australian home prices.

• After falling around 8% since late 2017, it is forecasting that prices will start to stabilise in the months ahead, potentially paving the way for modest increases to occur in 2020.

• A number of factors, including lower mortgage rates, an easing in lending standards and less new housing supply, underpin this view.

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Australia's house price downturn is nearly over, says Paul Bloxham, chief Australia and New Zealand economist at HSBC.

Thanks to lower mortgage rates, an easing in lending standards, government support for first home buyers and a reduction in new housing supply, Bloxham is forecasting that prices will start to stabilise in the months ahead, potentially paving the way for modest increases to occur in 2020.

Image: HSBC

"There are now some signs that the housing market is starting to stabilise," Bloxham said in a note released on Tuesday.

"Auction clearance rates have risen in the major cities, and consumer sentiment surveys suggest that households view now as an increasingly good time to buy a dwelling."

With the scale of the price falls now less severe than earlier in the year, especially in Sydney and Melbourne where median values have fallen the most in the current national downturn, Bloxham is banking on two 25 basis point rate cuts from the RBA this year, coupled with a likely easing in mortgage lending standards following proposed changes announced by APRA to help underpin prices from here.

"The housing market is also expected to be supported by cash rate cuts over the coming months, which should see mortgage rates fall, and a recent loosening of prudential settings by the authorities, both of which should support the flow of finance," he said.

"The government has also announced measures to support some first home buyers."

Bloxham also says the collapse in Australian building approvals since 2017, predominantly in the apartment sector, should also help to support prices, pointing to the likelihood of less new housing supply at a time when population growth is still humming along at around 1.6% per annum.

"Although housing supply has been growing in line with demand recently, which has weighed on housing prices, the leading construction indicators suggest a sharp slowdown in supply in the coming quarters, which should support prices," he said.

Providing another tailwind for prices, Bloxham also expects a pickup in household incomes to help boost demand for housing.

Combined, he says that after falling around 8% since late 2017, home price declines are likely to slow then stop in the second half of the year.

"We maintain our forecast that national housing prices will fall by around 10% peak-to-trough, which implies that prices should stop falling in the second half of 2019," he said.

"Given the recent supportive measures, we forecast housing prices to be flat to 4% higher in 2020."

This table from HSBC shows its updated price forecasts for individual capital city markets for this year and next. Across the country, it expects flat to modest price gains next year.

Image: HSBC

While Bloxham is forecasting that the housing downturn will come to an end later this year, he acknowledges that no forecast, including higher Australian home prices, is infallible.

"A turnaround is not certain," he said.

"For a start, overall sentiment in the housing market may remain subdued for some time, which would weigh on demand. That is particularly true for investors, where expectations of capital gains are often the key driver of demand.

"There is also a risk that the economy weakens more than we are expecting, for instance due to a shock from offshore, which would undoubtedly weigh on the housing market.

"Rising unemployment, in particular, would be a concern and would likely result in a rise in mortgage defaults and/or forced sales."