This article is from the Australian Property Journal archive
SYDNEY and Melbourne house prices are dropping at their fastest rate in this downturn, as the weakened market braces for the fallout of the banking royal commission findings, to be released today.
Commissioner Kenneth Hayne and commission chief executive Toni Pirani handed the final report to Governor General Peter Cosgrove on Friday, which coincided with the release of CoreLogic’s dwelling values data for January that showed price falls in every capital city except Canberra to start the new year.
Dwelling values fell by 1.0%, and have now decreased in 13 over the past 15 months and site 6.1% below the market peak of October 2017 – on par with levels last seen in October 2016.
CoreLogic head of research, Tim Lawless, said the weakest housing market conditions continue to be centred in Sydney and Melbourne.
Values in both of the major markets have fallen by at least 1% on a monthly basis each month since November last year, and an acceleration in the rate of decline over the past three months. The rolling quarterly fall is now at the fastest pace since the downturn began. Sydney values tumbled by 4.5% over the three months to the end of January, level with prices in July 2016, and by 4.0% in Melbourne, at January 2017.
On a monthly basis, Sydney’s fall eased slightly, with prices down by seasonally-adjusted 0.7% in January, while Melbourne – which peaked four months after Sydney – has seen the pace of declines gather speed. The 1.2% drop in January was the sharpest monthly decline in the current downturn.
Weaker housing market conditions are evident across most of the country. Only Hobart and Canberra recorded a rise in values over the past three months among the capital cities, while the 0.4% drop in Adelaide was the third consecutive fall in prices, and Perth and Darwin continued to fall.
AMP Capital’s chief economist, Shane Oliver said a crash landing – a national average price fall in excess of 20% – remains unlikely in the absence of much higher interest rates or unemployment, but is a “significant risk given the difficulty in gauging how severe the tightening in bank lending standards in the face of the Royal Commission will get and how investors will respond as their capital growth expectations collapse at a time when net rental yields are around 1-2%.”
He noted that while APRA has relaxed speed limits on lending to investors and interest only borrowers it indicated in the last week that “the changes…to strengthen lending standards are intended to be permanent”.
“The decline in Sydney and Melbourne property prices likely has much further to go as these considerations continue to impact particularly as comprehensive credit reporting kicks in making it even harder to get multiple mortgages and if changes to negative gearing and capital gains tax become reality after a change of government at the coming federal election.
Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 25% spread out to 2020 with another 15% to go given falls already seen, but for national average prices the top to bottom fall is likely to be around 10 to 15%.
Capital Economics said it now believed prices will eventually fall by 15%, up from its previous forecast of 12%. Morgan Stanley recently downgraded its peak-to-trough forecast for the national market from between 10% to 15% to around 15% to 20%.
“That would make the current downturn the longest and deepest on record by a wide margin. We believe that the downturn will result in weaker dwellings investment and slower consumer spending, which would drive a slowdown in GDP growth from 2.9% in 2018 to 2.0% this year,” Capital Economics economist, Ben Udy said.
He said that home sales fell by 4.1% month-on-month in October, the latest month for which reliable data are available.
“That meant sales have fallen by 23.4% over the past year and that our sales-to-new listings ratio fell to a fresh low, which suggests that house prices will keep falling at a rapid pace.”
Capital Economics recently suggested that Melbourne’s housing market downturn could stretch well into 2021, and would join Sydney in experiencing its largest cooling cycle in history. It believes prices in the two major markets would need to decline by another 20% to 30% to return to sustainable levels, and is expecting respective peak-to-trough falls of 17% and 20%.
NAB believes Sydney house prices will fall by 5.6% in 2019 and another 0.4% next year, while Melbourne will drop by 7.0% this year and then 2.2% in 2020, for peak-to-trough falls of around 15% overall in both cities. Hobart will remain the fastest-growing market, albeit at a slowed 1.8% this year and next, just ahead of Adelaide at 1.7% for both years. Brisbane and Perth will be steady.
Capital Economics senior Australia’s & New Zealand economist, Marcel Theliant said in a recent note that additional support for first-time home buyers would probably come too late to prevent a slump in dwellings investment this year, given the timing of the federal election and usual lags between home sales and construction activity.
Lawless said that while values aren’t falling across every broad region of the country, it was clear that even within the areas where values are rising, the market has lost steam. The only annual improvement was seen in Darwin, which saw the rate of decline ease from 9.7% to 3.5%; in regional Tasmania, which saw growth jump from 4.9% a year ago to 9.2%, and regional Northern Territory, from a decline of 1.0% to a 1.1% increase.
Regional markets are generally showing healthier conditions than the capital, with the combined regional index down 0.6% over the three months to the end of January compared a 3.3% slide for the capitals. Three of the seven broad “rest-of-state” regions posted falls in that time, including regional New South Wales, by 1.3%, while regional Queensland by 0.3%, and regional Western Australia by 0.8%.
Oliver said home prices in regional centres are likely to hold up better than Sydney and Melbourne as they haven’t had the same boom as Sydney and Melbourne, and offer much better value and much higher rental yields. The average gross rental yield for regional areas is 5%, compared to 3.8% in the capitals.
Australian Property Journal
