Is it Boom or BUST? – Louis Christopher

Well according to Louis Christopher from SQM Research, Australia’s housing market will likely record further dwelling price falls, driven by a deepening housing downturn in Sydney and Melbourne. Quite dramatic.   Louis tells us about other findings in his annual Boom and Bust Report and we tell you how to get it.
Kevin:   Well according to Louis Christopher from SQM Research, Australia’s housing market will likely record further dwelling price falls, driven by a deepening housing downturn in Sydney and Melbourne. Quite dramatic. Good day, Louis, how you doing?
Louis :   Good day there, Kevin.
Kevin:   Your boom and bust report just been released showing a really continuing to soften market, Sydney and Melbourne, but there are some winners out of all of this, aren’t there?
Louis :   That’s right. Sydney and Melbourne, the forecast is that dwelling prices are going to fall between 6 to 9%. That has definitely influenced the overall national result where we think the national result’s going to come in minus 3 to minus 6%. But not every city is going to fall in our view. Hobart’s slightly gained to be the out performer. It’s going to go up by another 5 to 9% in our view. Brisbane is going to be kind of flat, but there’s a chance of some dwelling increases. More importantly, the rental market in Brisbane’s going to tighter further, so our forecast for Brisbane is minus 2 to plus 2% in terms of changes in dwelling prices. And we’re expecting rental increases in Brisbane of plus 3 to 4%. So the worst is over, definitely for the rental market in Brisbane.
Louis :   Darwin’s looking very bad. Minus 8 to minus 4% in terms of dwelling prices and rental likely to fall minus 10 to minus 6%. Even the Northern Territory’ government’s basically declared a recession up there in terms of their budget forecast, so it’s pretty bad right now.
Kevin:   Hobart and Canberra, the standouts for us, aren’t they?
Louis :   That’s right. So Hobart, the forecast is that prices will rise between 5 to 9%. And Canberra 2 to 5%. And then when we look at the rental market for both those cities, rents are likely to increase between 5 to 8% for Hobart and 5 to 9% for Canberra. So, very tight rental markets where vacancy rates currently are under 1% in both those cities. And we see no relief in sight for tenants right now.
Kevin:   Tough going for tenants, particularly in that Hobart market, as you just highlighted there. Prices of course going up. So you’d wonder where a lot of them are going to go. It was one of the most affordable areas in Australia.
Louis :   Yes, that’s right. And still relatively affordable, just not as what it used to be. The market offering the best value right now is actually Adelaide. So we’re seeing a lot of value to be offered there in the Adelaide market. It’s there for a reason. There has been some economic challenges there in Adelaide. I must say that 2018 for Adelaide’s fared better than what we expected. We were really concerned about the close down of the automobile industry, but so far Adelaide’s actually fared better than feared. And its local rental market is quite tight. The forecast is that rents will rise between 3 to 5%, but for an investor’s perspective, if you’re looking for value, definitely take a look at Adelaide.
Kevin:   In terms of your forecast here, what are you saying about interest rates?
Louis :   Well, our forecast assumes that rates will stay on hold in 2019. There is one exception there. We think that potentially towards the end of 2019, the Reserve Bank of Australia may well cut. We have run a scenario where the banks lift interest rates out of step with the RBA as what they did in September. I wouldn’t want to see that happen on the housing market just as things are quite sour. It would mean that in Sydney and Melbourne that prices could fall by up to 11% just next year alone if we were to see the banks do that. And then there is another scenario we’ve run where the RBA does respond. It responds to this downturn and it cuts rates in the first half of next year by 50 basis points. And if that were to happen, then the price falls in Sydney and Melbourne would be minimised. Basically the prices would fall between 0 to 3% in Sydney and Melbourne.
Louis :   It is a big question. Will the Reserve Bank respond to the downturn in Sydney and Melbourne or will they let it ride?
Kevin:   So you’re calling for there to be either a hold on rates or at least a decline at some stage. Can I ask you, Louis, about negative gearing? Have you run any parallels over that, as what might happen?
Louis :   We have, Kevin. And we did up some detailed modelling on Labor’s policy back in 2016 and we’ve done some updates on that policy. I’ve got to say, Kevin, if Labour enact this policy during a downturn, this would be a very, very risky move for the economy. The reality will be is that that would drive prices further down, during a time when the local housing market’s very vulnerable. And it could trip the economy into recession. We’re well aware that Sydney and Melbourne represent 40% of the overall market. We’re well aware at this point in time that construction has been falling at a rate of knots. And the truth is is that construction represents 10% of total employment in this country. If we were to see that initiative brought in during a downturn, we have some significant concerns for the economy. And what we already are having some concerns about it. To the largest cities in a major housing downturn, but add that in, basically it’s anything could happen.
Louis :   It would be a dangerous period for the economy.
Kevin:   Louis, thank you so much for your time.
Louis :   Thank you, Kevin.

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