Property price declines could be twice as bad as expected

Investment bank Morgan Stanley thinks Australian property price declines could be twice as bad as expected.

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Investment bank Morgan Stanley thinks Australian property price declines could be twice as bad as expected.

The AFR has reported that Morgan Stanley believes that the declines could be worse because of weakening sentiment, tight credit and oversupply continuing to hit residential markets

Previous expectations for the property declines generally ranged from 10% to 15%, however these days most projections are for a fall of between 15% to 20%. This is bad news for the big banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB).

Many economists are predicting that the RBA's next move will now be down not up, in-fact Morgan Stanley are watching several key factors, including debt levels, which could impact the economy and may necessitate a interest rate drop.

Morgan Stanley said "There is evidence of a consumer pullback over Christmas but jobs impact will be key for any negative feedback loop to push Australia into a balance sheet recession".

Retail and property construction activity are two major areas where a decline could tip Australian into recession. Tamawood Limited (ASX: TWD) and Kathmandu Holdings Ltd (ASX: KMD) are just two ASX businesses to warn recently of poorer conditions.

The already-declining property prices and pressure in the Royal Commission has seen the major banks significantly increase their lending checks and reduce investor demand.

As long as the Australian unemployment rate doesn't suddenly spike then Australia shouldn't suffer too hard. I think it speaks of how strange economics is when a 95% employment rate is great for the economy but 90% is truly terrible.

Foolish takeaway

With Sydney and Melbourne house prices falling at an annualised rate of around 20% in December 2018, it seems quite likely that we will hit the 15% peak to trough fall level this year.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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