Australia Housing Downturn Protracted Yet Manageable, Citi Says

(Bloomberg) -- Australia’s property downturn will weigh on economic growth, with prices set to keep falling through 2019, Citigroup Inc. said.

Nationwide housing prices will fall between 10 percent to 15 percent from recent peaks, with “slightly larger” declines in Sydney and Melbourne, Citi analysts led by Paul Brennan wrote in a research note. While that would be the largest decline in recent times, it would just reverse the overvaluation of recent years, Citi said.

It’s likely to be a “protracted but manageable adjustment,” with “muddle through still the most likely scenario,” the report said.

Citi joins a chorus of banks turning more bearish on the housing market. HSBC Holdings Plc yesterday said housing prices in Sydney and Melbourne, the two hottest markets during the recent boom, will decline between 12 percent to 16 percent from their peaks, while UBS Group AG last week warned prices could plunge 30 percent under a deep-recession scenario.

The decline is already well underway, with Sydney prices down 7.4 percent in October from a year earlier, and Melbourne off 4.7 percent. Nationally, house prices dropped 3.5 percent last month from a year earlier, according to the latest CoreLogic data.

The cooling property market increases the likelihood the central bank will keep interest rates at a record low through late 2019, Citi said. In a speech in Melbourne late Tuesday, Reserve Bank Governor Philip Lowe said he’s closely watching the slump in housing prices in Sydney and Melbourne, though it’s being cushioned by a strong economy and labor market.

“Even assuming a continued orderly correction in the housing market, there will be a sizable drag on economic growth from the downturn in housing construction, the expected further slowdown in housing credit growth and some spillovers to consumer spending,” Citi said.

©2018 Bloomberg L.P.