Australian capital city dwelling price falls now worse than the GFC: Shane Oliver

EXPERT OBSERVER

Australian capital city dwelling prices fell another 1.2% in January marking 16 months of consecutive price declines since prices peaked in September 2017. This has left prices down 6.9% from a year ago. They have now fallen 7.8% from their September 2017 high which is worse than their GFC decline of 7.6%.

The decline is continuing to be led by Sydney and Melbourne. Sydney dwelling prices fell another 1.3% and they have now fallen 12.3% from their July 2017 high, which is their worst fall since the early 1980s recession. Melbourne prices fell another 1.6% and are down 8.7% from their November 2017 high, which is roughly equal to their fall in the GFC.

Other cities were also weak with Darwin prices down 1.7%, Perth down 1.1%, Adelaide and Brisbane down 0.3%. Hobart down 0.2%, but Canberra price rose 0.2%.

As can be seen in the next chart – just as the boom was concentrated in Sydney and Melbourne over the period from 2012 to 2017, so too is the bust, but other cities are looking pretty soft too.  

(Source: CoreLogic, AMP Capital)

The decline in property prices is continuing to be driven by a perfect storm combination of tighter lending conditions, poor affordability, surging unit supply, reduced foreign demand, the switch from interest only to principle and interest mortgages for a significant number of borrowers, fears that negative gearing and capital gains tax concessions will be made less favourable if there is a change of government, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors.

While APRA has relaxed the speed limits on lending to investors and interest only borrowers it has indicated in the last week that “the changes…to strengthen lending standards are intended to be permanent”. So the tough stance around borrowers actual income and expense levels and their total debt levels will continue and will likely even intensify this year as Comprehensive Credit Reporting kicks in.

These combined drags are most evident in Sydney and Melbourne because they saw the strongest gains into 2017 and had become more speculative with a greater involvement by investors. Ongoing weakness in these two cities was also evident in record low auction clearance rates late last year.

The decline in Sydney and Melbourne property prices likely has much further to go as these considerations continue to impact particularly as Comprehensive Credit Reporting kicks in making it even harder to get multiple mortgages and if changes to negative gearing and capital gains tax become reality after a change of government at the coming Federal election.

In these cities we now expect to see a top to bottom fall in prices of around 25% spread out to 2020. So there is more to go yet!

(Source: CoreLogic, AMP Capital)

Property prices in Perth and Darwin have already fallen 17% and 26% from their 2014 mining boom highs and are likely close to the bottom as the mining investment slump comes to an end (although I admit I have been saying that for a while now and they keep falling!). Other cities did not have a boom so are unlikely to have a bust.

But they will all be affected by tight lending standards, reduced foreign demand and uncertainty around negative gearing and capital gains tax and this is already becoming evident in price softness. Overall we expect flattish prices for capital cities outside Sydney and Melbourne but the recent weakness in several of them suggests the risks are on the downside.

Home prices in regional centres are likely to hold up better than Sydney and Melbourne 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 5% compared to just 3.8% in the capital cities.

Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 25% spread out to 2020 with another 15% to go given falls already seen, but for national average prices the top to bottom fall is likely to be around 10 to 15%. A crash landing – say a national average price fall in excess of 20% - remains unlikely in the absence of much higher interest rates or unemployment, but it’s a significant 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 goes in reverse and so homeowners will be less inclined to allow their savings rate to decline further. 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.

Price weakness has now gone beyond levels where the RBA started cutting rates in 2008 and 2011 and the 2015-16 property slowdown was also turned around by rate cuts in May and August 2016.

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) to help prices stabilise sometime around mid-next year.

DR SHANE OLIVER is the Head of Investment Strategy and Chief Economist for AMP Capital.