Expect property prices to remain constrained: Shane Oliver

EXPERT OBSERVATION

Australian capital city dwelling prices fell by just 0.1% in June, according to CoreLogic.

This marks 22 months of consecutive price declines since prices peaked in September 2017.

This has left prices down 8% from a year ago and they have fallen 10.2% from their September 2017, high which is worse than their GFC decline of 7.6%. 

The pace of monthly capital city average declines has slowed progressively from 1.3% in December to now just 0.1%, with Sydney and Melbourne actually seeing small price gains in June which along with Hobart helped offset quite steep price falls in all the other capital cities.              

Sydney dwelling prices rose 0.1% their first gain since July 2017 after a 14.9% top to bottom fall (which was their worst fall since the early 1980s recession) and Melbourne prices rose 0.2% which is their first gain since November 2017 after an 11.1% top to bottom fall (which was their worst fall in the period since 1980)

Perth prices fell another 0.7% and are now down 19.8% from their 2014 high and Darwin prices fell another 0.9% and are down 30.1% from their 2014 high.

Prices also fell in Brisbane (-0.6% in June and down 2.9% for their recent high), Adelaide (-0.5%) and Canberra (-0.9%). Hobart was the only capital city to see a gain (+0.2%). 

All capital cities have seen prices fall over the last three months.

Source: CoreLogic, AMP Capital

The combination of the election result which removed the threats to negative gearing and the capital gains tax discount, RBA rate cuts, and the relaxation of the 7% mortgage rate serviceability test have helped provide a bounce in home buyer demand.

With Sydney and Melbourne likely to have suffered the most under Labor’s proposed tax changes – because they have a greater share of investors in their property markets - they have seen the biggest benefit from the election result.

This is also evident in a continuing improvement in auction clearance rates in those two cities where June was the best month since September 2017 in Sydney and the best since February last year in Melbourne.

Source: Domain, AMP Capital

This is consistent with revisions to our home price forecasts after the election which revised the expected top to bottom fall for national capital city average home prices to 12% (from 15%) mainly due to upwards revisions to price forecasts for Sydney and Melbourne.

However, while home prices may now be at or close to the bottom they are likely to remain constrained and downside risks remain.

The situation today is very different to 2011 when the RBA first started to cut rates in this interest rate cutting cycle which in turn helped unleash booming conditions in the NSW and Victorian economies and rapid debt growth made easy by somewhat lax bank lending standards against a backdrop of undersupplied property markets all of which fuelled rapid growth in Sydney and Melbourne property prices.

By contrast today, household debt to income ratios are much higher, bank lending standards are much tighter such that a return to rapid growth in interest only and investor loans is most unlikely, the supply of units has surged pushing Sydney’s rental vacancy rate well above normal levels and unemployment is likely to drift up as overall economic growth remains weak.  

So while capital city average prices are likely to bottom by year end, we don’t see a return to boom time conditions but rather expect broadly flat home prices through 2020.

Source: CoreLogic, AMP Capital

Rising unemployment will be the key to watch. We expect unemployment to drift up to around 5.5% by year end and then to around 6% through next year, but a sharper rise could result in forced property sales and another leg down in property prices.

This is not our base case but is the key risk in terms of the property outlook.

Much higher unemployment is something the RBA is keen to avoid – in fact it wants unemployment to fall to 4.5% or below – so our view remains for a rate cut tomorrow (or if not then in August) and further cash rate reductions in November and February next year taking the cash rate to 0.5%.

Shane Oliver is Head of Investment Strategy and Chief Economist at AMP Capital.