Australian house prices down again in April with still more to go: Shane Oliver

Our base case remains that national capital city property prices will have a top to bottom fall of 15% out to a bottom in 2020 of which they have so far done nearly 10% and that for previous boom time cities of Sydney and Melbourne the top to bottom decline will be around 25% (of which they have so far done nearly 15% and 11% respectively). 

The negatives weighing on the property market remain significant and 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 ongoing switch from interest only to principle and interest loans, record unit supply still to hit particularly in Sydney and Melbourne, an 80% collapse in foreign demand, fears that negative gearing and capital gains tax arrangements will be made less favourable if there is a change of government 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. 

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Source: CoreLogic, AMP Capital

The slowing in the pace of home price falls (from -1.3% in December to -1.2% in January to -0.9% in February to -0.7% in March to 0.5% in April for the capital cities), along with a bounce in housing finance in February and a pick-up in auction clearance rates from their lows late last year are positive signs and at least suggest that we are not seeing any of the panic/forced selling that some had feared would occur.

However, the bounce in auction clearance rates looks to be largely seasonal and they remain historically weak, the nearly five year decline in Perth and Darwin property prices has seen several phases where price declines slowed then accelerated again and the start-up of Comprehensive Credit Reporting means that the tightening in lending standards could still have another leg to go, less favourable negative gearing and capital gains tax arrangements if there is an ALP victory could see renewed pressure on property prices next year and property prices outside of Sydney and Melbourne have been proving to be a bit weaker than we expected.

Implications for interest rates

Ongoing home price falls will depress consumer spending as the wealth effect has now become negative and homeowners are 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.

With growth slowing and inflation coming in weaker than expected, rate cuts are likely to come earlier than our previous expectation for cuts in August and November, with the first cut probably coming next week (although we admit that a May rate cut is a close call given its in the midst on an election campaign).

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Source: CoreLogic, AMP Capital

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 and/or a reduction in APRA’s minimum 7% mortgage serviceability test for new home loans) to help prices stabilise sometime around next year.

An earlier rate cut in May could bring forward the bottom in house prices as in the last two cycles they bottomed around four months after the first cut, although it is worth noting stronger supply conditions, tighter lending standards, higher debt to income ratios and depressed investor confidence will likely constrain the response of house prices to interest rate changes this time around.

Key points: 

• Although the rate of decline has slowed further, Australian capital city dwelling prices fell another 0.5% in April according to CoreLogic. This marks 19 months of consecutive price declines since prices peaked in September 2017. This has left prices down 8.4% from a year ago and they have now fallen 9.7% from their September 2017 high which is worse than their GFC decline of 7.6%.
• Sydney dwelling prices fell another 0.7% and they have now fallen 14.5% from their July 2017 high, which is their worst fall since the early 1980s recession. Melbourne prices fell another 0.6% and are down 10.9% 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 18.4% from their 2014 high and Darwin prices fell another 1.2% and are down 28.3% from their 2014 high. Prices also fell in Brisbane (-0.4% in April and down 1.9% for their recent high) and Adelaide (-0.1% in April and down 0.7% from their recent high) and even Hobart is now falling with a decline of 0.9%. Canberra was the only capital city to see a gain (+0.4%). 
• While Sydney and Melbourne have seen the steepest falls since 2017 (because they had the biggest boom between 2012 and 2017), other cities are pretty soft too with Perth and Darwin having been falling for five years now and Brisbane and Adelaide are proving weaker than we had expected despite not having had the prior boom that Sydney and Melbourne and, much earlier, Perth and Darwin had.   

SHANE OLIVER is the Head of Investment Strategy and Chief Economist at AMP Capital