• Australian home prices fell by 0.1% in February, leaving the 3-month decline at 0.8%
• Modelling from Morgan Stanley indicates prices may continue to fall in the quarters ahead
• If that happens, the bank says it will create downside risks for household spending, the largest part of the Australian economy

Following a weak stretch over summer, there’s tentative evidence emerging to suggest Australia’s housing market may be picking up a little steam.

Auction clearance rates have improved from the levels in late 2017, coinciding with a moderation in price declines in the second half of February, at least according to observations from CoreLogic.

While summer is a traditionally slow period for housing market activity, meaning recent trends may not be reflective of those to come during the busy autumn months, the picture appears to have changed a little from late last year.

Is this the start of another price upswing, albeit modest, or are the recent indicators providing a false reading on what’s to come.

Although no one can say they know for sure, if Morgan Stanley’s Australian housing model is anything to go by, it’s almost certainly the latter.

Using a variety of different metrics such as supply-demand balance, rental market conditions, mortgage serviceability, housing market accessibility, credit supply and house price expectations, the model attempts to predict what will happen to Australian house prices in the period ahead.

Based on the latest reading, it’s not looking good for those expecting price declines to reverse.

Here it is.

The model, known as MSHAUS for short, currently sits at the lowest level on record, indicating that recent price weakness will likely continue for some time yet.

While it does not have a perfect relationship to annual movements in house prices, it’s not exactly been lousy, either, especially longer-term.

This alone means its something worth paying attention to.

Morgan Stanley certainly thinks so, predicting that housing market activity will weaken even further in the quarters ahead.

“Our expectation is for the property market to slow further over 2018 with MSHAUS falling to the lowest level in its 30-year history.”

“We expect credit growth to continue to decline through regulatory pressure, and activity in the housing market to weaken.

“Given the economy’s exposure to housing through leverage, this poses further risks should the weakness broaden into household sentiment and consumer spending.”

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