Australian capital city dwelling prices fell for the ninth month in a row: Shane Oliver

EXPERT OBSERVER

Australian capital city dwelling prices fell for the ninth month in a row in July, with a fall of -0.6% which left average prices down -2.4% from a year ago, their weakest since 2012.

Sydney dwelling prices fell another 0.6% and have now fallen 5.4% from their August 2017 high, Melbourne prices fell another 0.9% and are down 2.9% from their November high. Perth (-0.8%) and Adelaide (-0.1%) also saw falls in July, but Brisbane, Canberra and Darwin saw gains and Hobart was flat and looks to be slowing after an 11.5% rise over the last year. 

Tighter bank lending standards – particularly around borrowers’ income and expenses and restricting loans to households with high debt to income ratios - along with poor affordability, rising supply, falling price growth expectations and FOMO (fear of missing out) going into reverse are pushing prices down in cities which have seen strong gains since 2012, ie Sydney and Melbourne.

This is also evident in weak and still falling auction clearance rates and auction sales volumes in those cities.

The recent average mid 40s auction clearance rate in Sydney and the low 50s action clearance rate in Melbourne are consistent with ongoing price weakness.

The decline in Sydney and Melbourne property prices likely has further to go as these considerations continue to impact.

We 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 to 12% downside.

So we are only part way there yet!

However, 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 at or close to bottoming (albeit the bottoming process may take a while), Adelaide, Brisbane and Canberra are likely to see moderate growth and the strength in Hobart is likely to continue albeit at a much cooler pace than seen over the last year.

Similarly home prices in regional centres (-0.4% in July, but +1.6%yoy) are likely to hold up better with modest growth as generally speaking they haven’t had the same boom as Sydney and Melbourne and so 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 have held up better than house prices but seem to be coming under more pressure falling 0.5% in July and they face further weakness as more supply comes on.

The residential crane count may have peaked in Sydney and Melbourne but its still high meaning that there is still a huge amount of units to hit these two markets.

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.

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 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.

Shane Oliver is the Chief Economist at AMP Capital