Expect property prices to fall 5 to 10 percent: Shane Oliver

The Sydney and Melbourne property boom is fading thanks to APRA’s tightening measures (higher rates for investors and interest only borrowers, etc), rising supply and weakening expectations.

Sydney auction clearance rates have already fallen into the mid-50s a level that points to price declines on an annual basis on the back of the experience in 2008 and 2012. (This didn’t happen in 2016 because the auction slowdown then was too brief.)

Source: CoreLogic, AMP Capital

Our view remains that average residential property prices in Sydney and, with a lag, Melbourne will fall 5-10% into 2019. Perth is bottoming and should start to see moderate price gains by 2019, with Darwin following too.

Brisbane, Adelaide and Canberra are likely to see continuing moderate gains over the next few years with some acceleration possible and Hobart will remain strong. 

Source: Domain, CoreLogic, AMP Capital

However, for those worried about what will keep the economy growing after the Sydney and Melbourne property boom ends there was good news over the last week.

• First, after years of disappointment the business investment cycle in Australia is finally on the mend. Not only did investment rise in the September quarter (providing a boost to September quarter GDP growth) but investment plans for the current financial year are up on those made a year ago for the first time since 2012-13 (see the next chart). While business investment intentions point to a further 20% of so fall in mining investment it’s now close to where it was as a share of the economy before the mining boom started and its drag on growth has collapsed to around 0.4% from around 1-1.5% a few years ago. More significantly non-mining investment plans point to a gain of around 12% this financial year with even the manufacturing sector looking to boost investment. The diminishing drag from falling mining investment and the improving outlook for non-mining investment (along with ongoing strength in export volumes and public infrastructure spending) has come just in time to offset the downturn in the housing cycle and the weak consumer. 

• Second, manufacturing conditions PMIs from both the AIG and CBA surveys were strong in November adding to evidence that manufacturing is doing well. 
• Finally, while building approvals are down from their 2015-16 highs they remain strong suggesting a slowing in housing construction but not a collapse (at least for now).

SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.