CBA's Gareth Aird forecasts 10 percent decline in Sydney house prices into 2019

Australia’s property market isn't going to crash, according to the Commonwealth Bank economist Gareth Aird.

Nor even a hard landing, but something not too dissimilar to the corrections of 2010 and 1989, he said.

But he has forecast that house prices in Sydney and Melbourne will continue declining until the end of next year.

“We (CBA) see the peak to trough being around 10% in Sydney and a little less in Melbourne (8.8%)," he told Business Insider.

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Source: Commonwealth Bank

Aird’s model is calculated as a function of the four variables listed below.

1. Annual changes in mortgage rates (1 year advanced);

2. The annual change in the flow of credit (six months advanced);

3. Auction clearance rates (four months advanced);

and 4. The house price expectations index from the Westpac/Melbourne Insitute consumer sentiment survey (2 months advanced).

He concedes that “predicting property prices can look foolish retrospectively”.

However, the chart below shows that the four leading indicators outlined above track actual movements in house prices “very well”.

Source: Commonwealth Bank

“Clearly, we can’t forecast auction clearance rates or the household perception around the future path of dwelling prices.”

CBA’s base case is that Sydney home prices will decline by 5% annually in 2018 — a relatively mild assessment given the latest weekly data from CoreLogic Sydney house prices are currently 5.9% lower than this time last year.

That would take overall declines from Sydney’s July 2017 peak to around 7.5%.

“For Melbourne, prices would be down by around 5% from their November 2017 peak,” Aird said.

“Nationally, we think prices will end the year down by around 3% with a roughly similar outcome likely in 2019."

Aird noted the broader economy outside of housing is still performing well, along with the continued strength in Australia’s labour market.

He expects the unemployment rate will decline further which lowers the risk of mortgage defaults.

There’s Australian rate of population growth, he added.