Sydney and Melbourne property prices could fall 25 percent: Shane Oliver

AMP Capital's economist Shane Oliver now envisages the prospect of an even more severe price correction for Sydney and Melbourne.

"For Sydney and Melbourne our base case has been that prices would have a top to bottom fall of around 20% out to 2020.

"However, the further plunge in auction clearance rates and acceleration in price falls late last year suggest a deeper fall possibly of around 25% (although it’s impossible to be precise).

"This suggests around another 15% fall in Sydney and more in Melbourne.

"A 25% top to bottom drop would take prices back to where they were in late 2014/early 2015."

Oliver says while prices in other cities are being affected by credit tightening they were less speculative and so are less vulnerable in 2019.

His new forecast came in a research paper that answered 11 burning questions about the housing downturn.

"Perth and Darwin have already seen prices fall back to decade ago levels.

"Other capital cities and regional centres generally didn’t have a boom and so are unlikely to have a bust.

"So for the rest of Australia flat prices to modest gains are likely.

"Taken together this suggests a top to bottom fall in national average prices of 10% to 15%, with another 5% to 10% this year," Oliver said.

Oliver said the movements don’t signal a “property crash”, rather a pullback from the inflated levels of the Sydney and Melbourne markets in the five years to 2017, where prices rose by 72 per cent and 56 per cent respectively.

“A 25 per cent plunge in Sydney and Melbourne may seem like a crash but given the extent of the prior gains it’s arguably not.

"But a 25% national average fall would probably be interpreted as a crash.

"Our assessment is that this is unlikely unless we see much higher interest rates or unemployment (neither of which are expected) driving a sharp rise in defaults and forced property sales or a collapse in immigration (which would collapse demand).

"Strong population growth is still driving strong underlying demand for housing."

He says it is unlikely interest rate cuts will quickly end the property cycle downturn as occurred in the 2008 and 2010-12 downswings.

"Rates are already low and debt is much higher," he said.