MELBOURNE’S housing market downturn could stretch well into 2021, and will join Sydney in experiencing its largest cooling cycle in history after prices rose “too far too fast” in the sustained upswing, according to Capital Economics, which also believes the two major markets would need to decline by another 20% to 30% to return to sustainable levels.
GDP growth is expected to slow further next year and the Reserve Bank will allay interest rate rises as a result, while NAB yesterday pushed back its forecast for a rate increase from 2019 to 2020.
“Our sales to new listing ratios suggest that prices will continue to decline in Sydney at around the current pace, whereas price declines in Melbourne may become even more pronounced,” Capital Economics economists Marcel Theliant and Ben Udy said in a note yesterday.
They expect Sydney’s peak-to-trough fall to be 20%, and Melbourne’s 17%. Recent CoreLogic data shows Sydney currently at 9.5% below its peak in July 2017– set to drift well beyond its previous record of 9.6% – and Melbourne’s at 5.8% since November last year. Capital Economics has Melbourne’s peak pegged at February this year.
Data released by the Real Estate Institute of Australia yesterday showed weighted average median house prices across the country fell by 1.6% in the September quarter, the biggest drop in almost seven years, while other dwellings fell by 0.8% for their largest decline in 12 months. Official data this week showed Melbourne prices posted a third consecutive quarter of falls with a 3.0% drop, taking it to an annual fall of 2.1%, while prices in Sydney dropped by 2.1% over the quarter to site 4.9% below 12 months ago.
Capital Economics believes prices in the two major markets would need to decline by another 20% to 30% to return to sustainable levels.
It reaffirmed its previous suggestion the full effect of the tighter lending conditions on house prices hasn’t yet been felt, and that the current downturn would be the longest and deepest in the country’s history, a forecast echoed by UBS.
“In fact, lending standards may be tightened further following the release of the Royal Commission’s final report on 1st February,” it said.
House prices across the eight capital cities will eventually fall by 12% from the 2017 peak, and “in light of the continued rapid pace of declines in the past six months, the risks to this forecast are firmly on the downside.”
Sydney prices are tipped to have tumbled 20% from their peak by the end of 2020.
“Assuming that household earnings gradually rise over this period, house prices in Sydney will then be much closer to our estimate of the sustainable level. We assume that prices will rebound by 2021,” Theliant and Udy said.
“By contrast, we expect price declines in Melbourne to accelerate further, reaching a trough at some point next year. And, as in Sydney, prices will probably continue to fall throughout 2019 and 2020. This would mean the current downturn would also become the largest on record for Melbourne. In fact, prices may continue to decline in 2021.”
Theliant and Udy said the current downturn has been triggered by tighter bank lending standards, but fundamental factors are also at work.
“In almost every capital city, the number of houses built in the past five years has outpaced the increase in the number of households. That has led to an oversupply of housing and is weighing on prices. While supply has started to fall, the imbalance will not be corrected for some time.”
They said the surge in housing completions relative to household formation in Western Australia could explain why house prices have been falling for much longer in Perth than elsewhere, but not Brisbane’s broadly stable prices and rises in Adelaide, while oversupply in New South Wales and Victoria “doesn’t look particularly severe”.
“The latest data show that the number of dwellings built has started to fall in NSW and the drop in building approvals suggest that construction activity will fall further. Building approvals in Victoria have also fallen sharply. A slowing in supply will cause price declines to eventually come to an end, although this may take a few years to come into effect.
“But prices rose too far. Arguably the key reason for the current downturn is that house prices rose too far too fast during the most recent boom in Sydney and Melbourne,”
Sydney prices skyrocketed by 75% between 2011 and 2017, and in Melbourne by 58% from 2012 to February this year. By contrast, Brisbane and Adelaide saw prices rise by 20%.
Bank of America Merrill Lynch this week said it expects the current national downturn to last until at least the middle of 2019, extending several months beyond the 15 to 16 months typically seen in the Australian market.
Capital Economics analysis shows Sydney has had eight downturns since 1988 – the minimum length is set at six months – with an average price fall of 6.1%, heavier than the national average of 5.1%. Melbourne has had six downturns in that time, with a 6.5% drop. Sydney’s current downturn is now its second-deepest on record, while Melbourne’s is currently third-deepest.
Prices in Adelaide may keep rising, Brisbane should remain steady, and prices may soon stop their fall in Perth and Darwin.
Earlier this week, the OECD warned Australian authorities and regulators to “prepare contingency plans” for a “severe collapse” in the housing market, which could trigger a wider economic shock and require government assistance for national lenders.
It suggested that while data so far points to a soft landing without substantial consequence for the overall economy, “nevertheless, risk of a hard landing remains”.
“Should this happen, household consumption could weaken. Households would cut their spending due to lower housing wealth and due to increased economic uncertainty generated by downturn.”
Capital Economics said the tighter labour markets in New South Wales and Victoria may prompt wages growth to pick up faster than in other parts of the country, which Capital Economics said would help dampen the impact of falling house prices on consumption.
“But we doubt that households will be able to shrug off such a large hit to their wealth. That’s a key reason why we expect consumption growth to slow further from 2.5% this year to 2.0% next year.”
In its latest business survey, NAB upgraded its peak to trough falls for Sydney and Melbourne to around 15% given most of the losses are factored in, while it has GDP growth slowing to 2.5% over the 2019 financial year.
The survey also asked respondents if they had seen falling house prices impact specifically on customer demand, to which around 75% replied “no impact”. Less than 10% said “somewhat”, and 3% “moderate”.
Australian Property Journal