Originally published by AMP Capital
- Australian capital city dwelling prices fell 0.6% in September marking 12 months of consecutive price declines since prices peaked in September last year. This has left prices down 3.7% from a year ago, their weakest since 2012.
- The decline is continuing to be led by Sydney and Melbourne. Sydney dwelling prices fell another 0.6% and they have now fallen 6.2% from their August 2017 high, Melbourne prices fell another 0.9% and are down 4.4% from their November high. Perth (-0.6%), Adelaide (-0.2%) and Darwin (-0.4%) also saw falls in September, but Brisbane, Hobart and Canberra saw small gains.
Tighter bank lending standards particularly around tougher income and expense verification and total debt to income limits, poor affordability, rising unit supply, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors are pushing prices down in cities which have seen strong gains since 2012, ie Sydney (which saw prices rise 72% over the five years to its August 2017 high) and Melbourne (which saw prices rise 57% over the five years to its November 2017 high). This is continuing to be evident in very weak auction clearance rates and auction sales volumes in those cities. Recent auction clearance rates averaging around the mid to high 40s in Sydney and Melbourne are consistent with ongoing price weakness.
The decline in Sydney and Melbourne property prices likely has further to go as these considerations continue to impact potentially accentuated by out of cycle bank mortgage rate increases and expectations that negative gearing and capital gains tax concessions will be made less favourable if there is a change of Government at the coming Federal election. We continue to expect these cities to see a top to bottom fall in prices of around 15% spread out to 2020 which given falls already recorded since last year implies another 10% or so downside. And if anything the risks are on the downside, particularly if negative gearing and capital gains tax arrangements are changed. So there is more to go yet!
Having not had the same boom over the last five or six years other capital cities are likely to perform better. Perth and Darwin are likely close to bottoming (albeit the bottoming process is taking a lot longer than I have been expecting!), Adelaide, Brisbane, Canberra and Hobart are likely to see moderate growth, with Hobart slowing down after its recent mini-boom.
Similarly home prices in regional centres (-0.2% in September, but +1.2%yoy) are likely to hold up better with modest growth 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 4.9% compared to just 3.5% in the capital cities.
Capital city unit prices (-1.7%yoy) have so far fallen less than house prices (-4.3%yoy) but face significant weakness in Sydney and Melbourne as the huge amount of units under construction hits the market.
Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 15% spread out to 2020, but for national average prices the top to bottom fall is likely to be around 5%. A crash landing (say with 20% plus average price falls) remains unlikely in the absence of much higher interest rates or unemployment, but it’s 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%.
Implications for interest rates
Ongoing home price falls in Sydney and Melbourne will depress consumer spending as the wealth effect goes in reverse and so homeowners will be less inclined to allow their savings rate to decline. It’s consistent with our view that the RBA will leave rates on hold out to late 2020 at least. Home price weakness is at levels where the RBA started cutting rates in 2008 and 2011, so we still can’t rule out the next move in rates being a cut rather than a hike.
In other data:
The AIG’s manufacturing conditions PMI rose 2.3 points to a strong reading of 59, telling us that manufacturers are continuing to do well. That said this indicator is very volatile month to month and I suspect that its exaggerating how strong things are.
The Melbourne Institute’s Inflation Gauge for September remained unchanged at 2.1% year on year with the “Trimmed Mean” underlying inflation measure falling to 1.8% year on year all of which tells us that inflation in the September quarter remained around the low point of the RBA’s 2-3% inflation target.