The housing market isn’t crashing, but it is cooling, which could force the Reserve Bank of Australia to cut interest rates again, Citi economists say. Stretched valuations that have fuelled speculation of an impending crash had been driven by under supply in the market, which peaked at 49,000 dwellings in 2013-14, versus the RBA’s estimate of 13,000, economists led by Paul Brennan said in a research note.
Citi expects the under supply will narrow to around half that rate on average over the next two years. Population growth will slow as the mining boom winds down and immigration levels drop, while regulatory restrictions will lower demand for property from investors and foreign buyers. “This narrowing should underpin ongoing slowdown in house price inflation, from 10 per cent in 2014-15 to 0 per cent to 5 per cent in 2015-16 and in 2017.”
The slowdown would be gradual, as supply remained strong with plenty of construction in the pipeline. Building approvals hit a record 230,000 in the 12 months to September. But the risk in this cycle was that apartments being built were outstripping houses two to one. “If all potential pipeline construction for apartments comes into market, it will pose a significant downside risk to price growth for the next two years,” Mr Brennan said.