|Editor Lawrence editing newsletter in Macau, China|
Australia’s propertyprice correction still has some way to go
CHRIS KOHLER JUL 26, 2018
The spectacular boom in Australian property prices has finally and officially buckled – national prices have recorded their first negative year since 2012.
Rather than dwell on who was right about calling the top of the property market, economists have turned their attention to predicting the size of the correction. And while forecasts vary considerably, the experts agree the slide is only just getting underway.
With prices now about 2 per cent below their December 2017 peak, according to Domain Group data, the downturn could be as little as one-sixth of the way through or as much as halfway, depending on which economist you ask. But all say a house-price bounce won’t be seen until noticeably more cash is wiped off Sydney and Melbourne’s median prices.
The economists each touch on a number of headwinds for the market, with the key concern being tighter lending rules and the possibility of further changes to come following the royal commission into banks. Out-of-cycle mortgage rate hikes and possible changes to property tax setting are also noted as contributing to weakening prices.
Capital city house prices dropped 1 per cent in the most recent quarter, according to Domain’s second-quarter data, which takes the annual drop to 1 per cent. Since peaking in December 2017, national house prices have given up 2 per cent and units are down 2.2 per cent.
Sydney leads the fall, with the city once at the core of Australia’s house price boom now giving up 4.5 per cent over the year – it’s worst result since the GFC. Sydney’s median house price now sits at $1.14 million.
Unit prices across the capital cities, meanwhile, gave up 0.4 per cent in the quarter and have now lost 2.2 per cent over the year.
The “correction we had to have” is rolling… Where and when will it stop?
No two predictions are exactly alike but economists from UBS, NAB, AMP Capital, ANZ, Capital Economics and CBA all predict weakness to persist for at least another 18 months.
Related: Biggest Sydney annual drop since GFC
Related: Brisbane outperforms Sydney, Melbourne
Related: Melbourne house price median falls
The most bearish of those six economic groups is Capital Economics, with chief Australia and New Zealand economist Paul Dales predicting a 12 per cent peak-to-trough fall in property prices across the nation by the end of 2021, based off CoreLogic’s hedonic house price data, which differ slightly to Domain’s stratified numbers.
On the more upbeat end of the spectrum, NAB chief economist Alan Oster sees a national peak-to-trough fall of roughly 3-4 per cent, with Sydney to give up 6 per cent and Melbourne to drop 4 per cent overall.
AMP Capital chief economist Shane Oliver, meanwhile, expects a sharp 15 per cent peak-to-trough fall in both Sydney and Melbourne, but only 5 per cent to be lost nationally as other cities show potential.
All six economists noted “downside” risks to their forecasts, meaning the falls could be bigger than they expect.
(Source: ANZ Research)
Context is key: “Correction, not a crash”
Several economists are quick to remind readers of their gloomy predictions that the seemingly steep fall in house prices comes after a long and epic boom in property prices.
With some broader perspective, the market is really travelling sideways, according to NAB’s Alan Oster.
“People say ‘well it could fall 10 per cent’… Well, yes but it’s still 30 per cent above where it was two years ago,” Mr Oster said.
CBA senior economist Gareth Aird, who forecasts a slightly deeper peak-to-trough fall than NAB, offers a similar view on the bigger picture.
“A fall in prices in Sydney of 10 per cent from peak to trough would take them back to their September 2016 level. And a fall of around 7.5 per cent in Melbourne from peak to trough would take prices back to their December 2016 level,” Mr Aird said.
“We don’t see prices softening much in the other jurisdictions as they simply didn’t experience the same growth in prices in the prior five-year period.”
A window for first-home buyers
First home buyers may see a window appearing after annual double-digit percentage price growth in Sydney and Melbourne had them sidelined for several years.
The now falling prices in those cities provides an opportunity, according to UBS economist Carlos Cacho.
“It’s certainly a good opportunity, but I’d say it’s probably going to get better,” Mr Cacho said.
With changes to bank lending standards putting pressure on investors and interest-only borrowers, the possibility of distress selling could prove a first-home buyer hunting ground.
“There are going to be good opportunities that come up, and that may be a seller who has an interest-only mortgage and is switching to principal and interest, and can’t afford the repayments, and so has to sell by a certain date. A case like that could provide an opportunity,” Mr Cacho said.
“But, overall, the market still has a fair bit further to go before we find the bottom.”