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Peta Tomlinson

ANZ Bank says it is vindicated for its bullish outlook over the past 18 months

THE DOWNTURN in the Australian residential property market is shaping up as one of the mildest on record, according to the ANZ Bank.

The bank also believed that this year would represent the bottom of the housing cycle, and that solid fundamentals would further underpin a market 'already in healthy balance'.

This upbeat forecast came from ANZ Bank senior economist Paul Braddick, who said the bank had been vindicated for its bullish view of the market over the past 18 months. Even when others  had been more bearish, Mr Braddick said he could not  see how their arguments stacked up against the underlying strengths of the Australian property market.

'It seems we have been on the right side of the market, saying that we weren't going to see a bust,' he said. 'We predicted a soft landing, and we've been vindicated. Even now, some commentators continue to be quite bearish, but this flies in the face of all the evidence.'

Property values doubled in five years  until the slowdown  last year, Mr Braddick said. Now, prices were moving sideways.

'The simplistic analysis is that if something goes up so fast, it will come down the same way. The reality is that if you compare the current situation with the early 1990s - the last bust - there are very different triggers,' he said.

'When interest rates rose at the end of 2003, it was by a total of 50 basis points. This was enough to take the heat out of the market, without causing a collapse. A decade or so earlier, the interest rate rises totalled over 800 basis points, and this engendered a very deep economic recession.

'Now, the economy is generally robust and conditions for the household sector are particularly strong. Employment growth is high, wages are accelerating, family payments have increased, and there have been broad-ranging tax cuts. Everything that underpins the market is strong, so even factors like higher oil prices are unlikely to have a major impact.'

For would-be investors wondering whether now is the time, Mr Braddick pointed to a pent-up demand for housing that continued to outstrip supply. This was especially the case in the key cities of Sydney, where the shortfall was estimated at 8,000 dwellings this year, and Brisbane.

Residential vacancy rates across most capital cities continued to fall, he added.

'Strong underlying fundamentals combined with weak sentiment creates opportunities, particularly in Sydney,' Mr Braddick said. 'A lot of people are quick to talk down apartment markets in Sydney and Melbourne, but even there, as new stock comes online, the demand is there to pick it up.'

Mr Braddick also disputed the much-mooted 'negative wealth' effect. He argued that house prices had doubled over the past five years, and now that they had levelled out, individual wealth had not fallen - it just had not had further gains.

'We do expect house prices will be quite flat until the middle of next year, and beyond that we expect to see some recovery in the market,' Mr Braddick said.

'Most capital cities are currently overvalued, but nowhere near the extent of the late '80s, when Sydney prices were overvalued by 61 per cent. We see them at somewhere around 17 per cent, which doesn't mean to say they will fall by that amount. As income grows, it will balance that out.'

Mr Braddick said it would be rare to see a significant price drop in Australian property. 'It has never happened,' he said. 'Even in the deep recession of the early '90s, house prices fell by less than 1 per cent at the national level.

'If that happened in the depth of a recession, it's hardly likely that house prices would collapse when economic conditions are so strong. As a result of microeconomic changes, Australia's economy is much more stable now than in the past. Interest rates don't need to move as far as they did in the bad old days of the late 1980s. As far as we are concerned, it is onwards and upwards from here.'



Market stays balanced after a soft landing