Sydney, Melbourne home prices will correct, but no bursting of bubble: KPMG Research

Home prices in Sydney and Melbourne will likely adjust after having been pushed to their peaks but they won’t resemble a ‘bursting of the bubble’, according to KPMG Economics. 

The report, titled Housing affordability: What is driving house prices in Sydney and Melbourne?, says the adjustment in prices is unlikely to be abrupt.

“Our analysis suggests that while short term factors have pushed median dwelling prices for Sydney and Melbourne above their long term equilibrium prices by about 14 percent and 8 percent respectively (as at the end of FY2016), this degree of disequilibrium has been experienced previously in these housing markets and they have managed to return to equilibrium without price movements resembling a ‘bursting of the bubble’,” it said.

Sydney's median home price are expected to decline, minus the effect of inflation, of up to 11 per cent as the cycle turned after 2019, but inflation effects would limit the nominal fall in price from $980,000 to $955,000 in 2021, says the report.

In Melbourne, the likely real decline of 4 per cent would mean a small decline in prices after inflation. The nominal median dwelling price is likely to plateau at $740,000 by June 2019, before peaking around $825,000 in 2021.

The report noted that the movement in Sydney house prices has been more volatile since the GFC, albeit without the same degree of volatility in the supply, demand or cost variables. 

“This data suggests that when the labour market and monetary policy are stable, investing in housing is more attractive as the underlying market risk is lower in these circumstances,” it said.

The report noted that the prospect of home ownership for “many seems to have become even more distant”. 

It said various commentators have blamed a range of factors that have ‘caused’ house prices to rise, including high net international migration, not enough social housing, limitations on the timing and release of new ‘greenfields’ development sites, and even the price of smashed avocado on toast for breakfast at a café. 

KPMG Economics says it found evidence of a long-run relationship between median dwelling prices and variables relating to the stock of dwellings, population and borrowing by residential property investors. It said each of these variables affect prices in different ways and different degrees.

It forecast that the Sydney housing market will experience a greater adjustment than will Melbourne, “but nonetheless this adjustment is unlikely to be abrupt or to significantly overshoot the long run equilibrium price on the downside”. 

In conclusion, it reiterated its solutions suggested in a previous report, Housing Affordability : What can be done about the Great Australian Dream, saying the steps include,

• CGT reduction: reducing the capital gains tax discount from 50 percent to 25 percent, thereby making property investment marginally less attractive. 
• Aggregate property tax: abolish stamp duty on the transfer of residential property and conflate rates, land tax, insurance taxes and emergency service levies into a new Property Services Tax.
• Systemic reforms aimed at maintaining the supply and diversity of land and housing in established and growth areas, through setting targets, streamlining planning and empowering public supply. 
• Targeted Reforms aimed at improving access to those groups who are the most excluded from affordable home ownership. This package would focus on more low cost housing, improved assistance to those who need it, and promoting shared equity.