Australian house prices near bottom but don't expect a boom soon: Shane Oliver

EXPERT OBSERVER

Australian capital city dwelling prices fell another 0.4% in May according to CoreLogic. This marks 21 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 10.1% from their September 2017 high which is worse than their GFC decline of 7.6%.

Sydney dwelling prices fell another 0.5% and they have now fallen 14.9% from their July 2017 high, which is their worst fall since the early 1980s recession. Melbourne prices fell another 0.3% and are down 11.1% from their November 2017 high, which is their worst fall in the period since 1980.

Perth prices fell another 1% and are now down 19.2% from their 2014 high and Darwin prices fell another 1.6% and are down 29.5% from their 2014 high. Prices also fell in Brisbane (-0.5% in May and down 2.4% for their recent high), Canberra (-0.2%) and Hobart (-0.4%). Adelaide was the only capital city to see a gain (+0.2%).

While Sydney and Melbourne have seen the steepest falls since their 2017 highs (because they had the biggest boom between 2012 and 2017), other cities are pretty soft too with Perth and Darwin still falling sharply after five years of declines and other cities all seeing modest decline lately.

While the pace of monthly declines has slowed progressively from 1.3% in December to now just 0.4%, the breadth of declines across cities remains broad with seven of the eight capital cities seeing falls in May and all seeing price falls over the last three months.             

(Source: CoreLogic, AMP Capital

National average capital city house prices are likely to remain under some pressure from tight credit (particularly as Comprehensive Credit Reporting kicks in), record unit supply and reduced foreign demand in the months ahead.

However, the combination of imminent RBA rate cuts, support for first home buyers via the First Home Loan Deposit Scheme, the relaxation of the 7% mortgage rate serviceability test and the removal of the threat to negative gearing and the capital gains tax discount following the Coalition’s Federal election victory point to house prices bottoming out by year end and at higher levels than we had been previously expecting.

In fact, Sydney property prices look to have bounced around 0.2% since the election as they were down 0.7% month to date up until May 17.

So after the election we cut our 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 which are now expected to have top to bottom falls of 19% and 15% respectively.

But given still high house price to income ratios and poor affordability, still very high debt levels, tighter lending standards and rising unemployment as economic growth remains soft and below potential a quick return to boom time conditions is unlikely. After bottoming later this year, which we expect to leave capital city average prices down 12% from their 2017 high, we see broadly flat house prices for 2020.

(Source: CoreLogic, AMP Capital)

DR SHANE OLIVER Head of Investment Strategy and Chief Economist AMP Capital