Falling prices in Sydney and Melbourne - is this the crash?

Falling prices in Sydney and Melbourne - is this the crash?
Shane OliverApril 8, 2018

Expert observer

Australian capital city home prices fell 0.2% in March, their fifth monthly fall in a row. This has brought annual growth down to 0.8% from 11.4% in May last year. Most of the recent weakness relates to Sydney and to a less extent Melbourne.

Click here to enlarge

This is unusual in that property price downturns are usually preceded by significant interest rate increases. Consistent with the fall in Sydney and Melbourne property prices, auction clearance rates and home sales have also fallen.

Click here to enlarge.

How far will prices will drop? Will the weakness spread to other cities? And what will it mean for the broader economy? 

Australia’s Achilles heel – the risk of a crash

With prices falling in Sydney and Melbourne some see this as the start of a crash. There is good reason to be concerned:

Real capital city house prices are 27% above their long-term trend (see the next chart) and are at the high end of OECD countries in terms of the ratio of prices to income and rents. 

Click here to enlarge

The surge in prices relative to income since the mid-1990s has gone hand in hand with a surge in the ratio of household debt to income that has taken it to the top end of OECD countries.

With a long period of strong prices and low mortgage rates has come some deterioration in lending standards with the share of new interest only loans reaching around 45% in 2015 and concerns about the reliability of borrowers’ income and living expense assessments when they take out loans.

Finally, there has been a surge in the supply of apartments, notably in Sydney evident in the high number of residential cranes in use, raising concerns about oversupply. 

Click here to enlarge.

However, a crash remains unlikely

While crash calls and stories of mortgage stress are common, they have been repeated endlessly over the last 15 years. But, a crash (say a 20% national average price fall) remains unlikely: 

First, the real driver of high home prices and their persistence has been that, thanks to tight development controls and lagging infrastructure, the supply of dwellings has not kept pace with population driven demand. Over the last decade annual population growth has averaged about 150,000 above what it was over the decade to the mid-2000s, which would require roughly an extra 50,000 new homes per year. But it’s only recently that supply has caught up with the pick-up in population growth. And population growth remains very strong. 

Click here to enlarge.

Consistent with this average capital city vacancy rates are at or below their long-term averages, notably in Sydney. Secondly, while mortgage stress is a risk: there has been a sharp reduction in interest only loans since APRA strengthened lending standards; debt servicing payments as a share of income have actually fallen slightly over the last decade and Census data shows that the share of owner occupier households with a mortgage for which debt servicing is above 30% of income has fallen from 28% in 2011 to around 20%; a significant number of households with a mortgage are ahead on their repayments; and banks non-performing loans remain low. While there has been some deterioration in lending standards it does not appear to be anything like that seen with NINJA (no income, no job, no assets) loans in the US prior to the GFC.

Finally, it is dangerous to generalise. Property prices have surged in Sydney and Melbourne but have fallen in Perth and Darwin and have seen only moderate growth in other capitals.

To see a property crash we probably need much higher interest rates or unemployment (neither of which are expected) or a continuation of recent high construction for several years (which is unlikely as approvals have cooled from their 2016 highs). 

Outlook

A further tightening in lending standards as banks get tougher on borrowers’ income and living expense levels along with rising supply and more realistic capital growth expectations by home buyers will see Sydney and Melbourne property prices fall another 5% or so this year with further falls likely next year. 

Click here to enlarge.

Adelaide and Canberra, but it may pick up a bit in Brisbane thanks to stronger population growth and the boom in Hobart has a way to go yet.

Regional centres are likely to provide relatively faster capital growth reflecting weaker supply and offering more attractive rental yields (around 1.5 percentage points higher than in cities). Units are at greater risk given surging supply, but so far house prices have slowed more in Sydney and Melbourne.

The property cycle and the economy

A slowdown in the housing cycle can affect the broader economy via slowing dwelling construction, negative wealth effects on consumer spending and via the banks if mortgage defaults rise. However, as things currently stand the drag from housing construction is likely to be minimal – building approvals don’t point to a collapse in new construction (see the next chart) and it looks like alterations and additions will rise, negative wealth effects will weigh on consumers but not dramatically if we are right, and in the absence of a property price crash the impact on the banks will be manageable. Finally, other sectors of the economy are taking over from housing, eg business investment and state capital works, as being growth drivers. 

Click here to enlarge

Implications for investors 

There are several implications for investors:

Firstly, over the very long term residential property adjusted for costs has had a similar return to Australian shares (see next chart). Its low correlation with shares, lower volatility but lower liquidity makes it a good portfolio diversifier. So, there is clearly a role for property in investors’ portfolios. 

Click here to enlarge

  • Secondly, there remains a case to be cautious regarding housing as an investment destination for now. It is expensive on all metrics and offers very low income (rental) yields compared to other growth assets. This means a housing investor is more dependent on capital growth.

  • Thirdly, these comments refer to Australian housing overall but it’s dangerous to generalise. Other cities and regional property are far more attractive than Sydney & Melbourne

 SHANE OLIVER is head of investment strategy and economics and chief economist at AMP Capital and is responsible for AMP Capital's diversified investment funds.

 

Editor's Picks

Orchard Piper secures $20m record-breaking penthouse sale at One Toorak Place
UEM Sunrise kicks off registrations of interest at One Oval, new Subiaco apartment development
"One of the rarest finds on the Mornington Peninsula": Inside Hali Dromana
BLVD pursues WELL Certification as demand for healthy homes grows
Off the plan apartment buying 101: What is BESS?

Related Projects

16-22 Maud Street, Newstead QLD 4006
16-22 Maud Street, Newstead QLD 4006
16-22 Maud Street, Newstead QLD 4006
Price
Contact agent
35-37 Mount Street, Prahran VIC 3181
35-37 Mount Street, Prahran VIC 3181
35-37 Mount Street, Prahran VIC 3181
Price
Contact agent
118-124 Benelong Road, Cremorne NSW 2090
118-124 Benelong Road, Cremorne NSW 2090
118-124 Benelong Road, Cremorne NSW 2090
Price
Contact agent
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
118-120 Matthew Flinders Drive, Cooee Bay QLD 4703
Price
Contact agent
26-62 Kinross Road, Thornlands QLD 4164
26-62 Kinross Road, Thornlands QLD 4164
26-62 Kinross Road, Thornlands QLD 4164
Price
Contact agent
9-11 Baroonba Street, Whitebridge NSW 2290
9-11 Baroonba Street, Whitebridge NSW 2290
9-11 Baroonba Street, Whitebridge NSW 2290
Price
Contact agent
18 Ransley Street, Penrith NSW 2750
Perle, East Side Quarter, Penrith - 18 Ransley Street, Penrith
18 Ransley Street, Penrith NSW 2750
Price
Contact agent
Ernest Cavanagh Street, Gungahlin ACT 2912
Raya, Gungahlin - Ernest Cavanagh Street, Gungahlin
Ernest Cavanagh Street, Gungahlin ACT 2912
Price
Contact agent
39 Browning Street, South Brisbane QLD 4101
39-41 Browning Street, South Brisbane - 39 Browning Street, South Brisbane
39 Browning Street, South Brisbane QLD 4101
Price
Contact agent
675 Gardeners Road, Mascot NSW 2020
Kiara North, Mascot - 675 Gardeners Road, Mascot
675 Gardeners Road, Mascot NSW 2020
Price
Contact agent
187 Salvado Road, Jolimont WA 6014
Jolie, Jolimont - 187 Salvado Road, Jolimont
187 Salvado Road, Jolimont WA 6014
Price
Contact agent
47 Maning Avenue, Sandy Bay TAS 7005
Grace Residences - 47 Maning Avenue, Sandy Bay
47 Maning Avenue, Sandy Bay TAS 7005
Price
Contact agent
Cove Lane, Narooma NSW 2546
Cove, Narooma - Cove Lane, Narooma
Cove Lane, Narooma NSW 2546
Price
Contact agent
52-56 Ramsay Street, Five Dock NSW 2046
Ava, Five Dock - 52-56 Ramsay Street, Five Dock
52-56 Ramsay Street, Five Dock NSW 2046
Price
Contact agent
2375 Gold Coast Highway, Mermaid Beach QLD 4218
The Alfred - 2375 Gold Coast Highway, Mermaid Beach
2375 Gold Coast Highway, Mermaid Beach QLD 4218
Price
Contact agent
129-131 Russell Ave, Dolls Point NSW 2219
ALLURE COLLECTION - 129-131 Russell Ave, Dolls Point
129-131 Russell Ave, Dolls Point NSW 2219
Price
Contact agent
155 Old Burleigh Road, Broadbeach QLD 4218
Sandpiper, Broadbeach - 155 Old Burleigh Road, Broadbeach
155 Old Burleigh Road, Broadbeach QLD 4218
Price
Contact agent
33 Vulture Street, West End QLD 4101
33 Vulture Street, West End QLD 4101
33 Vulture Street, West End QLD 4101
Price
Contact agent
19 Governor Terrace, Murarrie QLD 4172
Park Hill Village Collection, Murarrie - 19 Governor Terrace, Murarrie
19 Governor Terrace, Murarrie QLD 4172
Price
Contact agent
122 Marine Parade, Miami QLD 4220
Nalu, Miami - 122 Marine Parade, Miami
122 Marine Parade, Miami QLD 4220
Price
Contact agent
34 Jacaranda Place, Indooroopilly QLD 4068
34 Jacaranda Place, Indooroopilly QLD 4068
34 Jacaranda Place, Indooroopilly QLD 4068
Price
Contact agent
167 Old Burleigh Road, Broadbeach QLD 4218
167 Old Burleigh Road, Broadbeach QLD 4218
167 Old Burleigh Road, Broadbeach QLD 4218
Price
Contact agent
21 Queens Way, Yeerongpilly QLD 4105
Yeerongpilly Green - 21 Queens Way, Yeerongpilly
21 Queens Way, Yeerongpilly QLD 4105
Price
Contact agent
445-449 River St, Ballina NSW 2478
Solhaven - 445-449 River St, Ballina
445-449 River St, Ballina NSW 2478
Price
Contact agent
52 Sunset Boulevard, Surfers Paradise QLD 4217
52 Sunset Boulevard, Surfers Paradise QLD 4217
52 Sunset Boulevard, Surfers Paradise QLD 4217
Price
Contact agent
6 Jack Brabham Drive, Hurstville NSW
Horizon Hurstville - 6 Jack Brabham Drive, Hurstville
6 Jack Brabham Drive, Hurstville NSW
Price
Contact agent
49 Seena Drive, Edgeworth NSW 2285
49 Seena Drive, Edgeworth NSW 2285
49 Seena Drive, Edgeworth NSW 2285
Price
Contact agent
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Lot 118 Ocean Steamers Road, Port Adelaide SA 5015
Price
Contact agent
203 Ashmore Road, Benowa QLD 4217
203 Ashmore Road, Benowa QLD 4217
203 Ashmore Road, Benowa QLD 4217
Price
Contact agent
774 Ripley Road, Ripley QLD 4306
774 Ripley Road, Ripley QLD 4306
774 Ripley Road, Ripley QLD 4306
Price
Contact agent
6 Homelea Court, Rivervale WA 6103
6 Homelea Court, Rivervale WA 6103
6 Homelea Court, Rivervale WA 6103
Price
Contact agent
7002 Ripley Road, Ripley QLD 4306
7002 Ripley Road, Ripley QLD 4306
7002 Ripley Road, Ripley QLD 4306
Price
Contact agent
3 Delos Way, Sorrento WA 6020
3 Delos Way, Sorrento WA 6020
3 Delos Way, Sorrento WA 6020
Price
Contact agent
77 Sutton Street, Redcliffe QLD 4020
77 Sutton Street, Redcliffe QLD 4020
77 Sutton Street, Redcliffe QLD 4020
Price
Contact agent
181 Prospect Road, Prospect SA 5082
181 Prospect Road, Prospect SA 5082
181 Prospect Road, Prospect SA 5082
Price
Contact agent
593-595 Albany Highway, Victoria Park WA 6100
593-595 Albany Highway, Victoria Park WA 6100
593-595 Albany Highway, Victoria Park WA 6100
Price
Contact agent
1-28, 40 Civic Way, Rouse Hill NSW 2155
1-28, 40 Civic Way, Rouse Hill NSW 2155
1-28, 40 Civic Way, Rouse Hill NSW 2155
Price
Contact agent
1F Ashline Street, Wollert VIC 3750
1F Ashline Street, Wollert VIC 3750
1F Ashline Street, Wollert VIC 3750
Price
Contact agent
119 Queen Street & 86 King Street, Bendigo VIC 3550
119 Queen Street & 86 King Street, Bendigo VIC 3550
119 Queen Street & 86 King Street, Bendigo VIC 3550
Price
Contact agent
22-38 & 27-31 The Avenue, Coburg VIC 3058
22-38 & 27-31 The Avenue, Coburg VIC 3058
22-38 & 27-31 The Avenue, Coburg VIC 3058
Price
Contact agent
93-97 Bay Street, Brighton VIC 3186
93-97 Bay Street, Brighton VIC 3186
93-97 Bay Street, Brighton VIC 3186
Price
Contact agent
62 Constitution Avenue, Parkes ACT 2600
The Eastbourne on Commonwealth Park - 62 Constitution Avenue, Parkes
62 Constitution Avenue, Parkes ACT 2600
Price
Contact agent
1260-1272 Malvern Road, Malvern VIC 3144
1260-1272 Malvern Road, Malvern VIC 3144
1260-1272 Malvern Road, Malvern VIC 3144
Price
Contact agent
472 Regency Road, Prospect SA 5082
472 Regency Road, Prospect SA 5082
472 Regency Road, Prospect SA 5082
Price
Contact agent
273A Gorge Road, Paradise SA 5075
273 Gorge Road, Paradise SA 5075 - 273A Gorge Road, Paradise
273A Gorge Road, Paradise SA 5075
Price
Contact agent
270 The Esplanade, Miami QLD 4220
270 The Esplanade, Miami QLD 4220
270 The Esplanade, Miami QLD 4220
Price
Contact agent
5 Charles Street, Charlestown NSW 2290
5 Charles Street, Charlestown NSW 2290
5 Charles Street, Charlestown NSW 2290
Price
Contact agent
208 Meadowlands Road, Carina QLD 4152
208 Meadowlands Road, Carina QLD 4152
208 Meadowlands Road, Carina QLD 4152
Price
Contact agent
27-29 Dethridge Street, Northgate QLD 4013
27-29 Dethridge Street, Northgate QLD 4013
27-29 Dethridge Street, Northgate QLD 4013
Price
Contact agent
Lot 100 Maryvale Road, Athelstone SA 5076
Lot 100 Maryvale Road, Athelstone SA 5076
Lot 100 Maryvale Road, Athelstone SA 5076
Price
Contact agent