- While the rate of decline has slowed a bit in the past few months, Australian capital city dwelling prices fell another 0.7% in March according to CoreLogic, marking 18 months of consecutive price declines since prices peaked in September 2017. This has left prices down 8.2% from a year ago. They have now fallen 9.2% from their September 2017 high which is worse than their GFC decline of 7.6%.
- Sydney dwelling prices fell another 0.9% and they have now fallen 13.9% from their July 2017 high, which is their worst fall since the early 1980s recession. Melbourne prices fell another 0.8% too and are down 10.3% from their November 2017 high, which is their worst fall in the period since 1980. Perth prices fell another 0.4% and are now down 18.1% from their 2014 high and Darwin prices fell another 0.6% and are down 27.5% from their 2014 high. Prices also fell slightly in Brisbane (-0.6%) and Adelaide (-0.2%) and were flat in Canberra with Hobart still the only capital city to see a rise (+0.6%).
- Just as the boom was concentrated in Sydney and Melbourne over the period from 2012 to 2017, so too is the post 2017 bust, but other cities are looking pretty soft too and Perth and Darwin have been falling for nearly five years!
Is the slowing in momentum in monthly capital city average price declines (from -1.3% in December to -1.2% in January to -0.9% in February to -0.7% in March for the capital cities) and the rise in Sydney and Melbourne auction clearance rates from their December lows a sign that the property market is getting close to stabilizing helped perhaps by improved affordability, easier credit with the Royal Commission out of the way and optimism about the prospect of rate cuts? Possibly, but we remain doubtful and inclined to see it as just a bounce. The bounce in auction clearance rates from their December lows looks to be seasonal, the average auction clearance rates seen in March in both Sydney and Melbourne were the lowest March averages on records dating back to 2007, the moderation in house prices declines may also be seasonal with for example a similar slowing in the momentum of average capital city price falls a year ago (from -0.5% in December 2017 to -0.1% in March 2018) only to see price falls accelerate again, sales volumes continue to weaken from a year ago, the nearly five year decline in Perth and Darwin property prices has seen several phases where price declines slowed then accelerated again, while we see the RBA cutting rates this year it’s still likely to be several months way and more fundamentally the negatives driving the falls in property prices remain in place.
These include tight credit (which will get another boost from mid-year with the start-up of Comprehensive Credit Reporting which will see banks crack down on borrowers with multiple undeclared loans), the switch from interest only to principle and interest loans, record unit supply, an 80% collapse in foreign demand, questions about building quality following recent building problems, fears that negative gearing and capital gains tax arrangements will be made less favourable if there is a change of government next month and falling prices feeding on themselves with FOMO (the fear of missing out) becoming FONGO (the fear of not getting out). Taken together these are continuing to drive a perfect storm for the Sydney and Melbourne property markets because they saw the strongest gains into 2017 and had become more speculative with a greater involvement by investors.
In these cities we continue to expect a top to bottom fall in prices of around 25% spread out to 2020. So there is more to go yet, particularly in Melbourne where the residential crane count (and hence the prospective supply of units) is continuing to rise.
Property prices in Perth and Darwin have already fallen 18% and 27% respectively from their 2014 mining boom highs which has taken them back to levels seen in 2006 and 2007 respectively. They are likely close to the bottom as the mining investment slump comes to an end (although I admit I have been saying that for a while now). Other cities did not have a boom so are unlikely to have a bust. But they are all likely be affected by tight lending standards, reduced foreign demand and uncertainty around negative gearing and capital gains tax and this is already becoming evident in price softness. Overall we expect slight falls to flattish prices for capital cities outside Sydney and Melbourne but the recent weakness in several of them suggests the risks are on the downside.
Home prices in regional centres are likely to continue holding up better than Sydney and Melbourne as they didn’t have 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 5.1% compared to just 3.8% in the capital cities.
Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 25% spread out to 2020 with another 10% or so to go in Sydney and 15% in Melbourne given falls already seen, but for national average prices the top to bottom fall is likely to be around 15%. A crash landing – say a national average price fall in excess of 20% - remains unlikely in the absence of much higher interest rates or unemployment, but it’s a significant risk given the difficulty in gauging the impact of credit tightening 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 further to compensate for weak wages growth. It’s also a negative for banks and is consistent with our view that the RBA will cut the cash rate to 1% by year end. Price weakness has now gone beyond levels where the RBA started cutting rates in 2008 and 2011 and the 2015-16 property slowdown was also turned around by rate cuts in May and August 2016.
What will stop the property price falls?
It’s a while off yet but we expect a combination of RBA rate cuts flowing to lower mortgage rates, improved affordability thanks to lower prices, continuing strong population growth, the prospect of slowing new supply and possibly some form of Government support (like a new round of Federal First Home owner grants) to help prices stabilise sometime around next year.