Australia Housing, Loan Growth to Be Modest, Banks Forecast

Australian home prices will see a modest improvement as consumers remain conservative about their level of indebtedness, Westpac Banking Corp. and National Australia Bank Ltd. forecast.

“We’re not looking for another huge surge in prices or activity that we saw in, say 2009, or that we saw in 2001,” Bill Evans, chief economist at Westpac, said at the Bloomberg Australia Economic Summit in Sydney today. “The housing market will improve but it won’t improve to the point that people are becoming over-leveraged or we’d start to see real issues in our loan book.”

Home prices in Australia’s eight state and territory capitals have climbed 4.7 percent from their lowest point in May, Brisbane-based researcher RP Data said on April 2. That compares with a 11.1 percent surge in 2009, partly driven by government measures to boost demand in the wake of the collapse of Lehman Brothers Holdings Inc.

Australian home loan payments more than 90 days late fell to the lowest level since December 2010 in the fourth quarter of 2012, Fitch Ratings said today. The Reserve Bank of Australia’s 1.75 percentage point cut in interest rates since November 2011 has reduced the debt burden on borrowers, Fitch said.

Market Improving

“Clearly the market is starting to improve and I would expect it to increase,” Alan Oster, chief economist at NAB, said at the summit. “Australia’s default rates are very, very small and they’re not going up.”

Westpac forecasts a further 25 basis point cut in the RBA’s cash rate in June to 2.75 percent, data compiled by Bloomberg shows. NAB forecasts a 25 basis point cut in June and another in the fourth quarter, which would lower the benchmark rate to 2.5 percent.

Among Australia’s biggest cities, Sydney has the best prospects for prices, Evans said.

“In Sydney, affordability levels are the best that they’ve been for 10 years,” Evans said. “Over the last 10 years, Sydney house prices have gone up by 35 percent. In Melbourne and Brisbane, they’ve gone up by 80 percent to 90 percent, so I know where I want to be buying over the next few years.”

Home prices in Sydney rose 3.8 percent in March from a year earlier, compared with a 0.3 percent gain in Melbourne and 1.4 percent in Brisbane, RP Data said.

Mortgage Debt

Westpac and NAB are Australia’s second- and third-biggest home lenders, accounting for 26 percent and 17 percent of mortgages respectively in February, according to data from the Australian Prudential Regulatory Authority.

Mortgage debt has risen to 85 percent of gross domestic product from about 20 percent in 1990, which has been the primary cause of price increases, Steve Keen, author of Debunking Economics, said at the summit.

Price and mortgage growth in the past year has been driven by speculators betting on an increase in prices, he said.

“You aren’t going to get leverage anymore growing at anywhere near it used to,” Keen said. “That’s going to put the overall cap on price appreciation.”

Foreign investors have also been a “major source of demand”, and a reason for the increase in prices, he said.

A NAB survey of developers found that foreign buyers of new properties accounted for about 9 percent of total purchases, Oster said. “It’s probably going up now,” he said.

Property Developers

Property developers, who have written down about A$2 billion ($2.1 billion) of projects in the past year, will struggle the most from a sluggish housing market, John Kim, head of Australian property research at CLSA Asia-Pacific markets, said at the summit.

“Developers are not making money,” Kim said. “They have been running a break-even business in the last five years. Part of the problem is that not only have costs escalated, but the pricing assumptions have changed.”

Price growth expectations have gone from as much as 10 percent a year five to 10 years ago, to little change now, said Kim, who forecasts negative real price growth in the short term.

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