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Housing boom set to continue

House prices are predicted to rise at double-digit rates next year, according to HSBC chief Australian economist Paul Bloxham.

“Australia’s housing boom is beginning. We expect high single-digit housing price growth this year and low double-digit growth over 2014,” Mr Bloxham has told the Australian Financial Review (AFR).

He says that house prices have risen 9% since their lows in 2012, mainly driven by record low mortgage interest rates, and means the Reserve Bank is unlikely to cut rates much lower, and the next interest rate move could be upwards. That is likely to happen if the RBA becomes concerned about a housing bubble forming.

“Most households are well ahead on their existing mortgage repayments, so financial stability risks are low at this stage,” Mr Bloxham says. “Nonetheless, with a housing boom getting started, we think the RBA will be reluctant to cut rates further.”

Australian households have been using the lower interest rates to pay down debt, and hold much less debt than our American counterparts before the US housing market collapsed. Higher savings also means that buyers are stumping up higher deposits, and loan to valuation ratios (LVRs) remain conservative. Mr Bloxham says house prices need to show a solid rise just to make up for the losses experienced between late 2010 and mid-2012.

The housing construction sector is expected to be the major beneficiary, which should be good news for building materials companies Boral (ASX: BLD), Adelaide Brighton (ASX: ABC), Brickworks (ASX: BKW) and CSR (ASX: CSR). And that is what the RBA is banking on to boost economic growth as the mining boom and investment in the resources sector slows down.

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Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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