Australia’s Challenge to Have “Soft Landing” from Housing Boom

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.