How low can house prices go?

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THE NAB has again downgraded its forecast for house prices through this year and 2019, while confidence in the market has tumbled to historic lows amid pullback in Sydney and Melbourne prices and the tight lending environment.

The major lender’s Residential Property Survey for the June quarter showed sentiment among property professionals is now at its lowest since the middle of 2016 and below average.

They join a growing chorus of pessimism for the residential market. ANZ confirmed its revised outlook for the house market in June, and is now expecting price falls of up to 10%, led by Sydney and then Melbourne, should lending policies take down new loan sizes by 10% to 15%.

Macquarie Bank is anticipating a national house price drop of 2% in 2018 for a total fall of 6% from its peak, while Sydney will slide another 6% for a total 10% drop.

AMP Capital’s chief economist Shane Oliver tipped values to tumble by 15% from top to bottom nationally – of which 4% has already been realised – and that a property crash unlikely.

Chief economist at NAB, Alan Oster said the weakness in dwelling prices seen over the past year is likely to persist in 2018 and 2019, although NAB expects moderate rather than sharp price falls.

House prices are now expected to drop by 1.8% this year and by 0.1% next year, down from its April forecast of a 0.8% fall and 0.8% increase respectively.

He said the declines in 2018 to date have been more significant than initially expected.

“We now expect a slightly sharper decline in 2018 and a small fall in 2019 (was a small increase), driven by continued weakness in Sydney and Melbourne as well as a sharper decline in unit prices in Brisbane,” Oster said.

It has forecast to house prices to flatten in aggregate in 2020, implying a peak to trough fall of 6.5% in Sydney and 2.5% in Melbourne.

Sydney prices are expected to drop by 3.7% this year, and a further 0.7% in 2019, followed by Melbourne with a 2.3% drop before flattening out. Perth will drop 0.7% this year, and then by 0.2%.

Hobart leads growth forecasts with 8.4% this year an d 1.7% in 2019, then Adelaide with 1.5% and 1.7%, and Brisbane 0.1% growth before no movement next year.

“Any further tightening in lending standards or additional changes to government or prudential policy to address affordability or financial stability concerns are likely to have an impact on these forecasts,” he added.

Property professionals also said credit constraints are impacting housing markets more than they have for a number of years amid intensified lending scrutiny by banks and APRA-inspired tighter credit policies.

The survey takes responses from 300 property professionals. Expectations for house prices were scaled back in all states over the June quarter, with falls coming for both NSW and Victoria, while Queensland and Western Australia will lead the country for capital growth over the next 1-2 years.

The Index fell by 17 points to 6 in June, its lowest level since mid-2016 and below its long-term average of 14.

Falling house prices and rents prompted a 33-point drop in WA, taking it back to -26 after the state returned its first positive reading in four years in the first quarter. NSW was down by 27 for the same reason, to -12. Victoria was down 13 to 17, but stayed positive due to a pick-up in rents, while SA/NT and Queensland also fell but stayed positive.

However, confidence levels fell to a new survey low, driven down mostly by NSW – now the least confident state at -9 – and Victoria, at 19. SA/NT was the most confident given rental growth forecasts, at 60, followed by Queensland (37) and WA was at 16, for a reading of 20.

Longer-term confidence also dropped. Victoria was down by 28 to 23, and NSW by 27 to 3. WA fell 10 to 55 and Queensland by 6 to 49, while SA/NT was up 17 to 67.

Apartment prices will drop by around 2% in each of the next two years as the eastern capitals continue to receive strong supply despite softening demand. Sydney unit prices are expected to fall by 1.6% and then 2.4% this year and in 2019, likewise Melbourne (by 1.4% and 1.9%) Perth (5.0% and 0.2%) and Brisbane (2.4% and 4.5%).

Gains will be seen both this year and next in Hobart (5.3% and 1.2%) and Adelaide (1.4% and 0.5%).

In good news for landlords, the outlook for rents remains positive in all states and is likely placing upward pressure on yields. Victoria leads income return expectations, with rapid population growth contributing to low vacancy rates.

Housing demand from first home buyers continued to offset a reduction in demand from foreign buyers in new and established housing markets.

“State government incentives and moderating house prices are likely helping first home buyers move onto the property ladder,” Oster said.

The share of first home buyer owner occupiers of new developments rose to a survey high 29.1%, up from 26.1%. The share of first home buyer investors also increased from 13.1% to 13.7%, and in total accounted for a survey high 42.9% of new property sales, up from 39.2%.

Government policies in China on foreign investment outflows and tighter restrictions on foreign property buyers in Australia contributed to the drop in foreign buyers, which dropped from 10.9% to 9.6% of new housing market share over the quarter – well below their series peak of 17% in Q3 2014 – and from 5.7% to 4.8% in established markets, their lowest share since Q1 2012.

While foreign buyers reduced involvement in Victoria (down from 12.1% to 11.7%) and NSW (11.8% to 7.4%), their market share in Queensland spiked to a 4-year high, from 11.5% to 22.8%.

Australian Property Journal