How much does Morgan Stanley think your house price will fall?

Morgan Stanley has increased its forecast for house price falls, saying that while a cyclical adjustment in prices is already under way, a deeper correction is yet to come.

More house price pain on the way

The broker had forecast 5% to 10% falls in house prices following the tax changes announced at the May Federal Budget. Falls at the low end of this range have now occurred.

Morgan Stanley has now increased its prediction to a 10% to 15% fall.

The broker said they had predicted that the tax changes combined with increases in interest rates would lead to 5% to 10% falls, "one of the largest adjustments in 40 years''.

They added:

While out of consensus at the time, the subsequent data has validated this view, with national prices down 5.2% from their March peak, and the weakness broadening across regions, with turnover down sharply and unsold stock building. While house prices are now within our forecast range of peak-to-trough decline, the backdrop has worsened since May.

Foremost among the downside risks is the prospect of further interest rate increases as early as next month.

Morgan Stanley does not expect the bottom of the downturn to arrive until the second half of 2027.

Commenting on the predicted 10% to 15% fall, they added:

This would be Australia's largest nominal housing downturn in over 40 years. Interest rates remain the key sensitivity of the depth of the downturn from here. Our forecast for the RBA to remain on hold near-term should see low double-digit declines in home prices, while further tightening in line with market pricing would push the decline closer to the higher end of our range.

Recovery in house prices not currently on the cards

Morgans Stanley said five key factors were important in predicting the bottom of the market, with three of these factors needed at once to trigger a recovery.

They said:

All five troughs since 2008 came with at least three of these triggered. Today, none are triggered, and none has been for nine months. The RBA is constrained by inflation and relaxed about financial stability, policy is still tightening and buying remains near-record expensive relative to renting. We do not expect these factors to turn before mid-2027, which is why we see a trough in the second half of 2027.

Morgan Stanley said a "v-shaped" recovery in the market appeared less likely because investors are now disincentivised from buying, and there was also a fading migration tailwind.

The broker is predicting Australian economic growth of just 1.1% in 2027, well below consensus estimates of 1.7%.

The post How much does Morgan Stanley think your house price will fall? appeared first on The Motley Fool Australia.

Motley Fool contributor Cameron England has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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