Australian capital city dwelling prices fell for the tenth month in a row: Shane Oliver
EXPERT OBSERVER
Australian capital city dwelling prices fell for the tenth month in a row in August, with a fall of -0.4% which left average prices down -2.9% from a year ago, their weakest since 2012.
The decline is being led by Sydney and Melbourne. Sydney dwelling prices fell another 0.3% and have now fallen 5.6% from their August 2017 high, Melbourne prices fell another 0.6% and are down 3.5% from their November high. Brisbane (-0.2%), Perth (-0.6%) and Hobart (-0.1%) also saw falls in August, but Adelaide, Canberra and Darwin saw small gains.
Source: CoreLogic, AMP Capital
Tighter bank lending standards, 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 also evident in very weak auction clearance rates and auction sales volumes in those cities. Recent auction clearance rates averaging around the high 40s in Sydney and low 50s in Melbourne are consistent with ongoing price weakness.
Source: Domain, CoreLogic, AMP Capital
The decline in Sydney and Melbourne property prices likely has further to go as these considerations continue to impact potentially accentuated by recent 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. So there is more to go yet!
Source: CoreLogic, AMP Capital
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 could take a while yet), Adelaide, Brisbane, Canberra and Hobart are likely to see moderate growth, with Hobart already starting to slow down a bit.
Similarly home prices in regional centres (-0.2% in August, but +1.6%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 3.4% in the capital cities.
Capital city unit prices are starting to come under more pressure and they face further weakness as more supply comes on. There is still a huge amount of units to hit in Sydney and Melbourne.
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 remains unlikely in the absence of much higher interest rates or unemployment, but it’s a 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 is now going 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.
Dr Shane Oliver
Head of Investment Strategy and Chief Economist AMP Capital