Housing Downturn

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<p class="post-title entry-title">EXPERT OBSERVER</p>
<p class="post-title entry-title">Although the official statistics suggest something slightly different, by my reckoning Sydney's housing market has now entered its third year of downturn.</p>
<div>From a purely psychological point of view, this makes for a testing time for owners, and some may now choose to sell.  </div>
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<div>I'm interested in opportunities, but one of the challenges facing bargain-hunters - at least in the areas that are typically of most interest - is that Sydney's regional unemployment rates are as close to zero as you'll ever see. </div>
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<div>Click <a href="https://1.bp.blogspot.com/-zQj8VeqmxnU/XHhf4Egzx6I/AAAAAAAAuw4/_7pp0VW2TYcFLt_g8Pi1qPhoEz_JtIb6gCLcBGAs/s640/UE.jpg" target="_blank">here</a> to enlarge</div>
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<div>The cash rate setting is also at the lowest ever level, so there's little in the way of mortgage stress to report in inner Sydney, although tighter access to credit and the interest-only mortgage reset could smoke out some portfolio investors. </div>
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<div>And despite record levels of construction in recent years, Sydney doesn't really have a structural oversupply.</div>
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<div>What it does have, though, is a few concentrated gluts of apartment completions and projects hitting the market at the same time, which might give rise to some distressed sales or failed apartment projects. </div>
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<div><strong>Pockets of pain</strong></div>
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<br>My experience in Britain has taught me that sharp price falls are sometimes seen when the economy really turns bad, leading to rising unemployment and forced sellers - hardly a widespread problem facing Sydney at this point in time - and sometimes in the most supply-responsive areas.</div>
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<div>I spent a long time last week looking for bargains in the Sydney market, and in the east I couldn't find anything - I mean, not a single thing - that you might term a bargain, or anything even approximating to a bargain. </div>
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<div>I don't really know enough about Homebush, Parramatta, Blacktown, or Western Sydney to comment in any meaningful way.</div>
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<div>The best examples I could find of significant price declines, at least within 20 kilometres of the City, were mostly in areas zoned for higher-density housing or construction hotspots.</div>
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<div>Epping was a standout example, where scores of apartments were sold off the plan around 2014, and it's not too hard in that area to find examples of units for sale at well below the 'as new' price (although, interestingly, some have been advertised 'almost as new').</div>
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<div>Resale prices in some developments look likely to be up to 15 to 20 per cent lower than the off-the-plan price after an assumption for discounting is factored in.</div>
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<div>A high proportion of such apartments was bought by non-residents, and jt's probably fair to say that total return might not have been absolutely front of mind for some off the plan buyers. </div>
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<div>Locations around Epping and parts of the Hills District have experienced a huge surge in apartment completions in recent years. </div>
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<div>Finding a tenant would be hard work right now for landlords, which might encourage more sellers in 2019.</div>
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<em>PETE WARGENT is the co-founder of AllenWargent property buyers (London, Sydney) and a best-selling author and <a href="https://petewargent.blogspot.com/" target="_blank">blogger</a>.</em> </div>
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Where are the Sydney property bargains? Pete Wargent

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<p>EXPERT OBSERVER</p>
<p>The July CoreLogic index results show the Melbourne property market is the worst capital city performer since the onset of COVID-19. June marked the third consecutive month of value falls across the city. This sees values down -2.3% from the previous quarter, when the market hit a record high. </p>
<p>The results may be surprising, particularly when considering that the Sydney growth rate, which often moves quite closely with Melbourne property, was less than half this rate in the same period (at -0.8%). Several factors may explain why Melbourne in particular has experienced a more rapid decline.</p>
<p><strong>Melbourne has sometimes ‘led’ cycles, and has often been more volatile</strong></p>
<p>Data suggests that the Melbourne market has experienced a turn in its market before others. This was evident in the most recent upswing, where Sydney and Melbourne saw peak growth rates around November 2019, while other capital cities continued to see a more moderate but accelerating growth rate.</p>
<p>A longer-term view suggests it is not uncommon for Melbourne to outpace capital growth in Sydney, or to see deeper rates of decline.</p>
<p>The divergence is particularly evident through the 2010-2012 downturn, following a substantial over-performance from Melbourne during the post-GFC stimulus fuelled growth phase.</p>
<p>The most recent upswing before COVID-19 also saw Melbourne growth rates peak higher than in Sydney. The Melbourne quarterly growth rate peaked at 6.4%, compared with 6.2% across Sydney.</p>
<p>Cyclically then, it is not unreasonable to see Melbourne values slip at a greater rate than other capital cities.</p>
<p>Research also suggests that property markets where incomes are higher, households are more indebted and investor activity is higher can also be more sensitive to changes in economic conditions. This has been consistently evident in the upper quartile of values across the Melbourne market, which had the strongest value increases amid the last upswing, and are currently showing the largest falls.</p>
<p>High levels of investment are also evident in the Melbourne market, which may be contributing to volatility, though this is present in Sydney too.</p>
<p>ABS finance data shows investor lending has comprised an average 32.3% of total mortgage lending across Victoria for the past 5 years.</p>
<p>This is higher than most other states and territories.</p>
<p>Given that Melbourne has also experienced higher growth rates before the onset of COVID, and may be approaching a trough more quickly, Melbourne may not be the ‘worst performer’ over the entire cycle, but just based on a snapshot view of the past couple of months.</p>
<p>However, there are some key structural factors creating added downward pressure on Melbourne property prices.</p>
<p><strong>ELIZA OWEN </strong><em>is the Head of Research Australia at CoreLogic</em></p>
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Why is Melbourne property leading the downswing? CoreLogic's Eliza Owen

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<p>Harvey Norman will be the most vulnerable of the ASX listed retailers to the housing downturn, Citi analysts Bryan Raymond and Craig Woolford have told clients.</p>
<p>It came in a 38-page report ranking the retailers the broker considers most exposed to a fall in house prices.The analysts point out that the housing cycle had already turned, but this is yet to be reflected in retailer share prices.</p>
<p>According to the broker, Harvey Norman and Wesfarmers are most exposed, with 39 per cent of Harvey Norman's group earnings driven by furniture and appliances and 40 per cent of Wesfarmers' earnings from hardware chain Bunnings.Metcash and JB Hi-Fi were high up the list, with 25 per cent of the wholesaler group's earnings from hardware businesses Mitre10 and Home Timber and Hardware.</p>
<p>About 18 per cent of JB Hi-Fi's earnings are in whitegoods following its Good Guys acquisition.</p>
<p>But Harvey was quick to denounce the report.</p>
<p>"I've been doing this for 50-odd years, and I've had this question only asked 20 to 30 times.</p>
<p>"There's not a lot of validity to it," Mr Harvey said, adding he tended not to read any broker reports, this one included.</p>
<p>"When the housing prices do go down a bit – and I don't know how much they are going to go down, my view is it will be very minimal – the population is still increasing at the moment by 300,000 a year. I'd much rather that than property prices go up and there's no extra people."<br>Citi estimates that for every 1 per cent move in house prices, Harvey Norman's sales, earnings and share price increase by 4 per cent and Nick Scali by 6 per cent.</p>
<p>The broker says that hardware retailers are more protected than furniture retailers.</p>
<p>The broader market has a 1.8 per cent rise for every 1 per cent increase in housing prices, the broker said.</p>
<p>The broker considered the impact of the housing downturn in 2011 and 2012 on Harvey Norman's share price, suggesting it triggered an earnings fall, price earnings de-rating and share price decline. It suggested it was among the retailers that experienced significant average sale price declines in the television category.</p>
<p>Harvey said there was "no proof" that television sales were linked to housing prices.</p>
<p>"It's tied to technology a lot more than it is to housing downturns," he said. "That just shows people don't understand the industry."Citi has a "sell" recommendation on Harvey Norman.It values the company currency trading at $3.52 at $3.12 a share. The broker also argues that as Harvey Norman owns some 95 of its 195 Australian sites, that rental income could come under pressure.</p>
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Citi says Harvey Norman will be hit hardest in the housing downturn

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<p>Across the capital cities, Melbourne has been leading the downturn, with the quarterly rate of decline outpacing Sydney since May this year, according to CoreLogic.</p>
<p>Melbourne dwelling values were down 1.8% over the past three months, followed by Perth (-1.5%) and Sydney (-1.1%). </p>
<p>Melbourne’s decline phase commenced five months later than Sydney’s, with the market peaking in November last year.</p>
<p>Since that time, Melbourne dwelling values have fallen by 2.9%, while in Sydney, where values peaked twelve months ago, the market is down 5.4%.</p>
<p><img src="https://www.urban.com.au/images/2018/8/1/CL%20JULY%20Graph%201.JPG" alt=""></p>
<p>Those cities where values continue to trend higher have also seen a sharp reduction in their rate of capital gain, the July update noted.</p>
<p>In Brisbane and Adelaide, where housing values were rising at a more sustainable pace over the past five years, the annual rate of capital gains has weakened.</p>
<p>In Brisbane, the annual rate of growth has eased from 2.9% a year ago to 1.2% over the past twelve months and in Adelaide the annual growth rate has dropped from 5.4% a year ago to just 0.7% over the most recent twelve month period.</p>
<p>Even the Hobart market, where the annual pace of capital gains has held in double digit growth territory since January 2017, is starting to slow down. Dwelling values were steady over the month and the annual rate of growth slowed to 11.5%; still strong but the slowest annual growth rate since February 2017.</p>
<p><img src="https://www.urban.com.au/images/2018/8/1/CL%20JULY%20Graph%202.JPG" alt=""></p>
<p>National property dwelling values slipped 0.6% during July to be down 0.9% over the rolling quarter and 1.6% lower over the past twelve months in the largest annual fall since August 2012.</p>
<p>Since peaking in September last year, the Australian housing market has recorded a cumulative 1.9% fall in value which CoreLogic's head of research Tim Lawless suggests was "a relatively mild downturn" to date considering values remain 31% higher than they were five years ago.</p>
<p>According to Tim Lawless, the weakness in dwelling values is being driven by the long running declines in Perth and Darwin along with an acceleration in the rate of decline across Sydney and Melbourne and slowing growth rates across most of the remaining regions.</p>
<p><img src="https://www.urban.com.au/images/2018/8/1/CL%20JULY%20Graph%203.JPG" alt=""></p>
<p>July saw the housing downturn gather some momentum; on a national basis, the 0.6% month on month fall was the largest decline since September 2011 and the rolling quarterly change, at -0.9%, hasn’t been this low since January 2012.</p>
<p>Five of the eight capital cities saw values slip lower over the past three months and trends across the regional housing markets, where conditions have generally been more resilient to falls, have also turned negative.</p>
<p>Dwelling values were down 0.2% across the combined regionals index over the three months ending July, driven by falls across regional NSW (-0.2%), regional Qld (-0.6%) and regional WA (-3.5%). While three of the seven ‘rest of state’ regions saw a fall in values over the three month period, the pace of growth across the remaining regional areas has clearly decelerated, contributing to the overall softer result.</p>
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Melbourne the weakest as five of eight capital cities see declines in property values over past three months

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<p>Macquarie Group now forecasts the current downturn in Sydney's housing market will be larger than it first anticipated, with price declines of between 15 per cent to 20 per cent likely.</p>
<p>The decline will wipe out price gains secured since 2015, putting buyers over the last three years into negative equity.</p>
<p class="_1665V undefined">The report suggests the falls to date have so far "been orderly with little evidence of distressed selling." But it suggests the fear of buying too early by buyers waiting in the wings will send the market into deeper decline.</p>
<p class="_1665V undefined">The report, headed Healthy Correction or Bruising Bust? says without any significant economic downturn the medium term, most likely scenario was several years of flat prices after the fall.</p>
<div class="_1665V undefined">“In June, we revised our expectations to be for a 4 to 6 per cent peak-to-trough fall in national housing prices and for a decline of around 10 per cent in Sydney,” wrote Justin Fabo and Ric Deverell, members of Macquarie Research’s economics team.</div>
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<div class="_1665V undefined">“Fast forward to now and it’s becoming clear that the extent of price declines is likely to be even larger."</div>
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<div class="_1lC_G">“The overall decline is now likely to approach 10 per cent… the largest peak-to-trough decline in nominal housing prices in almost 40 years.”</div>
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The report noted Sydney average dwelling prices had fallen 9 per cent already and were "currently falling at annualised monthly rates of roughly 10 per cent."</div>
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<div class="_1665V undefined">“This suggests that Sydney and Melbourne housing prices are now more likely to fall by 15 to 20 per cent from the peak."It acknowledged the fall in Sydney prices "is already one of the largest on record.”</div>
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<div class="_1lC_G">“Because of the extent of the rise in Sydney and Melbourne housing prices in recent years, even a 20 per cent peak-to-trough decline would merely take prices back to April/May 2015 levels,” they say.</div>
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<div class="_1lC_G"><img src="https://www.urban.com.au/images/2018/11/8/Graph%203.JPG" alt=""></div>
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<div class="_1lC_G">"With the benefit of hindsight it is now clear that the housing price correction will be deeper. </div>
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<div class="_1lC_G">"Investor demand has moderated significantly amid price falls, and negative sentiment is weighing on both owner-occupier demand for housing (fear of buying too early) and the availability of credit as banks more rigorously apply lending criteria in the face of the risks associated with the Royal Commission (fear of being accused of irresponsible lending)," Fabo and Deverell noted.</div>
<p>They argued recent concerns over a potential credit crunch and Labor's negative gearing potential impact are overblown.</p>
<p>"A significant curtailment of the availability of credit should see declining average loan sizes in addition to weak aggregate lending. We are seeing neither of those." they say.</p>
<p>It also suggest the risk posed by the proposed changes to negative gearing and capital gains tax from any Labor Government "will likely be small"</p>
<p>This article was first published in the Daily Telegraph.</p>
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Fear of buying too early will send property downturn deeper: Macquarie

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<p>The second half of 2018 saw the major risks associated with the residential property market increase significantly and this will continue well into 2019 and beyond, according to RiskWise Property Research CEO Doron Peleg.</p>
<p><span>He also stated, tighter lending standards, the results of the Royal Commission, the fear of the potential changes to negative gearing and capital gains tax, political uncertainty and unit oversupply, in conjunction with a sharp drop in dwelling commencements, will shape the entire landscape of residential property into 2020.</span></p>
<p><span>“And this means it is more important than ever to identify the red flags when it comes to buying property,” Mr Peleg said.</span></p>
<p><span>“There’s every chance the ALP will win this year’s Federal election and implement changes to negative gearing and capital gains tax. In fact, we have already seen an impact on the market due to uncertainty and fear about these changes, with price reductions accelerating following the Liberal leadership spill of Malcom Turnbull by Scott Morrison. In addition, auction clearance rates have dropped below 50 per cent in both Sydney and Melbourne.</span></p>
<p><span>“The risk of price reductions are likely to remain very high at least until the second half of 2020. This adds uncertainty and impacts buyer sentiment,” Mr Peleg stated.</span></p>
<p><span>Riskwise state that they have identified the red flags for high-risk dwellings that property investors should avoid,</span></p>
<p><span>These include oversupply, poor economic growth, as seen in Perth and South Australia, high unit-to-house ratios, high vacancy rates and units unsuitable for families.</span></p>
<p><a href="https://www.propertyobserver.com.au/subscribe" target="_blank"><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/1/Subscriber%20strip%20ad.jpg" alt=""></a></p>
<p><span>Mr Peleg said there was a "high possibility" the value of an off-the-plan property may decrease between the original contract date and settlement.</span></p>
<p><span>Regions most as risk of this are Brisbane City, Fortitude Valley and South Brisbane which have all been named in the Top 10 of the RiskWise 2018 list of the 100 Worst Off-The-Plan Suburbs in Australia.</span></p>
<p><span>So have Zetland and Epping in Sydney and Southbank in Melbourne, where oversupply of units is a huge issue.</span></p>
<p><span>RiskWise research shows high-rise buildings generally carry higher risk than small unit blocks from both a capital growth and cashflow perspective, although Mr Peleg said this risk depended on the specific suburb and other factors such as strata payment and specific property features, all of which should be assessed on a case-by-case basis.</span></p>
<p><span>When it comes to purchasing property and avoiding the potential risks it's critical to perform independent research and avoid taking advice from so-called “property professionals or wealth creators” who were not paid for their services.</span></p>
<p><span>“No one works for free in the housing industry. If you are not paying, you are not the client, and someone else is, for example a property developer, and that means there is an agenda to get you to buy whether it is for your benefit or not. In other words, you will pay in the long run,” he concluded.</span></p>
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Buyer beware: the red flags for high-risk properties in the Australian housing downturn

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<p>EXPERT OBSERVER</p>
<p>With the housing market weakening over the past few years, most capital cities have experienced dwelling value falls with a more significant correction experienced in Sydney, Melbourne, Perth and Darwin.</p>
<p>Although the past few decades have been characterised by increasing property values, that doesn’t mean there haven’t been periods when property values have reversed; in fact the housing market is highly cyclical with upswings generally followed by a period of falling values.</p>
<p>At a national level, since 1980 there have been eight separate housing market downturns (as highlighted in the first chart).</p>
<p>The current downturn which commenced after October 2017, has seen values fall by -6.8%. Although that may not seem like a substantial downturn, since the early 80s there have only been two downturns which were larger, 2008-09 and 1982-83.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%201.JPG" alt=""></p>
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<p>National housing market downturns have also been generally fairly short-lived with the current downturn of 16 months already the second longest with the 2010-12 decline running two months longer than the current downturn.</p>
<p>The decline in values throughout the current downturn has been larger across the combined capital cities, with values now -8.6% lower.</p>
<p>By next month, assuming the falls continue, this will be the largest downturn in the combined capital city index any time since 1980.</p>
<p>The current downturn is also closing in on being the longest.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%202.JPG" alt=""></p>
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<p>With values having peaked in September 2017, they have now been falling for 17 months with the previous longest period of decline coinciding with the last recession, running for 20 months between 1989 and 1991.</p>
<p>Since peaking in July 2017, Sydney dwelling values have fallen by -13.2% to February 2019.</p>
<p>Not only is this now the deepest period of decline it is also one of the longest. With little sign that the falls will abate over the coming months, this current downturn may end up being the deepest and longest in modern times.</p>
<p>This downturn is also very different to other downturns which have generally been driven by an economic contraction or higher interest rates.</p>
<p>This downturn is more closely linked to a significant tightening of credit conditions at a time in which the economy continues to grow and interest rates are unchanged (despite some moderate increases for owner occupiers and larger rises for investors).</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%203.JPG" alt=""></p>
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<p>The housing market in Melbourne peaked in November 2017 and up until the end of February 2019 dwelling values across the city have fallen by -9.6%.</p>
<p>Interestingly, comparing the downturn in Melbourne to Sydney, 15 months into Melbourne’s downturn values have fallen -9.6% compared to a decline of -8.2% 15 months into Sydney’s downturn.</p>
<p>The downturn in Melbourne’s housing market is closing in on its largest downturn of -10% between 1989 and 1992 while the downturn (so far) has been much shorter than the 36 month period in 1989-92.</p>
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<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%204.JPG" alt=""></p>
<p>While Sydney and Melbourne have recorded substantial increases in dwelling values over recent years and are now seeing large falls, Brisbane never saw anywhere near the magnitude of value growth during the upswing.</p>
<p>Despite more moderate growth in recent years, values in Brisbane are now falling on an annual basis, albeit quite moderately.</p>
<p>Brisbane dwelling values peaked in April 2018 and they have now declined by -1.0% to February 2019. To date the fall is moderate however, with housing market weakness entrenched values are expected to move slightly lower or, at best hold firm, over the coming months.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%205.JPG" alt=""></p>
<p>Much like Brisbane, value growth in Adelaide has been moderate over recent years however, that has not stopped values from starting to decline over recent months.</p>
<p>Values peaked in December of 2018 and have fallen over each of the past two months to be -0.3% lower at the end of February 2019.</p>
<p>While there have been previous periods of value falls in Adelaide, they have tended to be more moderate than those recorded across the other capital cities.</p>
<p>To-date the decline has been short and moderate and it will be interesting to see over the coming months whether values continue to fall.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%206.JPG" alt=""></p>
<p>The Perth housing market has been in an extended downturn over recent years with values having now fallen by -17.8% since their June 2014 peak.</p>
<p>The current downturn has run substantially longer than previous downturns and it is also a much deeper value fall than recorded across previous downturns.</p>
<p>In late 2017/early 2018 it was looking as if the falls were coming to an end however, the market has weakened further in line with weaker labour market and economic conditions as well as tighter credit conditions.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%207.JPG" alt=""></p>
<p>Hobart is the only capital city in which dwelling values are continuing to rise.</p>
<p>Although they are still rising, the annual rate of growth in February 2019 was recorded at 7.2% which was its slowest rate of growth since October 2016.</p>
<p>Housing affordability has been a big driver of growth over recent years however, housing affordability has been eroded and there is a likelihood that the rate of growth will continue to ease over coming months.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%208.JPG" alt=""></p>
<p>Darwin housing data commences from 1999 and over that time there have only been two downturns. The current downturn which commenced from May 2014 has now seen values in Darwin fall by -27.0%.</p>
<p>The downturn is significantly longer and deeper than the previous downturn and the deepest downturn recorded for any capital city over recent decades.</p>
<p>With weak labour market and economic conditions persisting, there is a high likelihood of further declines this year.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%209.JPG" alt=""></p>
<p>Canberra dwelling values fell by -0.2% in February 2019. Although there is no evidence of a negative trend, the rate of annual growth has been consistently slowing and it is clear that some heat has exited the Canberra housing market.</p>
<p>Although values may edge lower, the outlook for Canberra’s housing market is likely to be relatively steady conditions.</p>
<p><img src="https://www.urban.com.au/images/2019/3/14/Widespread%2010.JPG" alt=""></p>
<p>With values now falling across most capital cities the question of course becomes when do the falls stop.</p>
<p>No one really knows the answer to that question, our models show, at least for the short-term, that values are likely to continue trending lower, with the rate of decline easing later this year and into 2020.</p>
<p>The other main question is once markets reach a trough, how quickly will the market recover?</p>
<p>Historically, market recoveries from their trough have generally been fairly rapid however, the recoveries have generally been driven by lower interest rates or a mix of stimulus such as the first home buyers grant boost.</p>
<p>Although there is an expectation that interest rates may move lower, we probably won’t see the entire rates cuts passed through to mortgage rates and the much tighter credit conditions are likely to limit any rebound in the housing market, particularly given borrowers are being assessed on their ability to repay a mortgage at a much higher rate (above 7%).</p>
<p><em><strong>CAMERON KUSHER</strong> is a Senior Analyst for CoreLogic</em></p>
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House value downturn still spreading: Cameron Kusher

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<p>EXPERT OBSERVER</p>
<p>The housing cycle and house prices always incite high interest in Australia. Until recently it was all about surging prices and poor affordability – particularly in Sydney and Melbourne. Over the last year it’s turned into how far prices will fall and what’s the impact on the economy.</p>
<p>Global issues and the election aside, the housing downturn is likely to be the main issue for Australia in 2019.</p>
<p><strong> How far have home prices fallen?</strong></p>
<p>According to CoreLogic data, up until December capital city dwelling prices are down 7% from their September 2017 high. This masks a wide range though with Sydney down 11% from its July 2017 high, Melbourne down 7% from its November 2017 high, Perth down 16% and Darwin down 25% from their mid 2014 mining investment boom highs but other cities continuing to trend up to varying degrees. Recently the declines have been led by Sydney and Melbourne. House prices are on average down more than unit prices and prices in regional centres have generally held up better than capital cities.</p>
<p><strong>What is driving the falls?</strong></p>
<p>The fall in property prices comes after a boom – most recently over the five years to 2017 that in particular saw Sydney prices rise 72% and Melbourne prices gain 56%. This, on top of gains since the mid-1990s, saw a sharp deterioration in affordability, prices become overvalued relative to income, rents and their long-term trend and reach expensive levels by global standards. The surge in home prices went hand in hand with a surge in debt that has seen the ratio of household debt to income go from the low end of OECD countries to the top end. High prices and high debt left Australian housing very vulnerable.</p>
<p>What has changed in the last two years is that:</p>
<ul>
<li>It’s become harder to get a loan as regulators forced banks to tighten lending standards and the Royal Commission seems to have made banks even more cautious. </li>
<li>A big pool of interest only borrowers are switching to principal and interest driving higher debt servicing costs. </li>
<li>Banks have cut lending to SMSF funds to invest in property. </li>
<li>The supply of units has surged to record levels. </li>
<li>Foreign demand has fallen sharply. </li>
<li>As rising prices fed on themselves by driving expectations for more price gains (FOMO - fear of missing out), falling prices are driving reduced price expectations and leading to reduced demand and FONGO (fear of not getting out). </li>
<li>Investors are starting to factor in less favourable negative gearing and capital gains tax arrangements if there is a change of government. </li>
<li>Problems regarding the Lacrosse and Opal buildings have dented confidence around building standards. </li>
<li>It's unlikely interest rate cuts will quickly end this property cycle downturn as occurred in the 2008 and 2010-12 downswings. Rates are already low &amp; debt is much higher.</li>
</ul>
<p><strong>What will be the impact of tax changes?</strong></p>
<p>The Australian Labor Party’s policy since the last election has been to limit negative gearing to new property and double capital gains tax on investments held for more than 12 months. This is aimed at improving housing affordability which means lower prices. Put simply, such changes would make it less attractive for investors to invest in residential property which would be negative for prices.</p>
<p>A study by Riskwise Property Research and Wargent Advisory found that this would lower property prices ranging from 2 to 3% in Tasmania to around 9% in Sydney. While the tax changes are proposed to be grandfathered, it’s likely it’s already reducing investor demand as investors worry that when it comes time to sell their property if the tax changes occur then there will be less demand.</p>
<p><strong>How far will home prices fall?</strong></p>
<p>For Sydney and Melbourne our base case has been that prices would have a top to bottom fall of around 20% out to 2020. However, the further plunge in auction clearance rates and acceleration in price falls late last year suggest a deeper fall possibly of around 25% (although it’s impossible to be precise). This suggests around another 15% fall in Sydney and more in Melbourne. A 25% top to bottom drop would take prices back to where they were in late 2014/early 2015.</p>
<p>While prices in other cities are being affected by credit tightening they were less speculative and so are less vulnerable. Perth and Darwin have already seen prices fall back to decade ago levels. Other capital cities and regional centres generally didn’t have a boom and so are unlikely to have a bust. So for the rest of Australia flat prices to modest gains are likely. Taken together this suggests a top to bottom fall in national average prices of 10 to 15%, with another 5 to 10% this year.</p>
<p><strong>Will home prices crash?</strong></p>
<p>This is a bit of an unhelpful question like the “are we in a property bubble” questions of a few years ago as it’s hard to define and implies a degree of inevitability in terms of the implications. A 25% plunge in Sydney and Melbourne may seem like a crash but given the extent of the prior gains it’s arguably not. But a 25% national average fall would probably be interpreted as a crash.</p>
<p>Our assessment is that this is unlikely unless we see much higher interest rates or unemployment (neither of which are expected) driving a sharp rise in defaults and forced property sales or a collapse in immigration (which would collapse demand). Strong population growth is still driving strong underlying demand for housing. While mortgage stress is a risk, it tends to be overstated, and is unlikely to be a generalised issue unless interest rates or unemployment shoot higher. And, while Sydney and Melbourne are at risk, other cities have not seen the same boom &amp; so are unlikely to crash.</p>
<p>Although many like to make comparisons to the US at the time of the GFC, there are two big differences. Australia has not seen the surge in sub-prime loans where money was lent to home owners who often had “no income, no job, no asset” (NINJA loans). Secondly, our mortgages are full recourse meaning we won’t see “jingle mail”, where home owners can send back the keys just because the house value falls below their debt, which then saw the bank put the property back on the market pushing home prices even lower.</p>
<p>However, the risk of a crash cannot be ignored given the danger that banks may become too tight and that investors decide to exit in the face of falling returns.</p>
<p><strong>Have home prices fallen before?</strong></p>
<p>A common property myth is that prices only ever go up and never fall. But a simple look at history tells us this is not so. Real house prices (ie prices after the impact of inflation) in Sydney fell 36% in 1934-35, 32% in 1937-41, 41% in 1942-43, 12% in 1947-48, 14% in 1951-53, 12% in 1961-62 and 22% in 1974-77.</p>
<p>In nominal terms based on CoreLogic data Sydney dwelling prices fell 25% in 1980-83, 10% in 1989-91, 8% in 2004-06 and 7% in 2008-09. So a 25% fall this time around would be similar to that seen in the early 1980s.</p>
<p>What will be the impact on the economy? The housing downturn will affect the broader economy via slowing dwelling construction, negative wealth effects on consumer spending (ie, our wealth goes down, we feel poorer, we spend less than otherwise) and if rising defaults drive a further slowing in bank lending. The first two will detract 1 to 1.5 percentage points from economic growth. Growth in infrastructure spending and business investment should help keep the economy growing but its likely to be constrained to around 2.7% which in turn will keep wages and inflation low.</p>
<p><strong>What is the impact on banks?</strong></p>
<p>The main risk for banks is that the property downturn drives a rise in defaults. However, full recourse loans mean that just because home prices fall resulting in negative equity, defaults won’t necessarily rise. In the absence of much higher interest rates or unemployment making it harder for people to service their loans, a big rise in defaults is unlikely.</p>
<p>However, it’s still a risk and the housing downturn will likely mean slower bank lending which will constrain bank profits.</p>
<p><strong>What will it mean for interest rates?</strong></p>
<p>Constrained growth due to the housing downturn resulting in lower for longer inflation will likely drive the RBA to cut interest rates this year, with two cuts taking the cash rate to 1% by year end. Our base case is that this will occur in August and November (giving the RBA chance to assess the election and tax cuts), but soft data could see it come earlier.</p>
<p>Tax cuts from July are unlikely to be big enough (the Government is allowing for just $3bn pa in tax cuts which is just 0.1% of GDP) to head off the need for rate cuts.</p>
<p><strong>Is the house price downturn good or bad?</strong></p>
<p>This depends on who you are. For baby boomers who got in years ago, have paid off their debt and saw the value of their home rise to levels they never believed sustainable, a fall back to 2014/15 levels may be no big deal.</p>
<p>For those who got in more recently and have a big mortgage price falls are more of a downer and its this group for whom negative wealth effects will be greatest.</p>
<p>For millennials trying to get in its great news – assuming the housing downturn is not so great that it knocks the economy for six and they lose their jobs. For investors…</p>
<p><strong>What does it mean for investors?</strong></p>
<p>Over the very long-term, residential property adjusted for costs has similar returns to Australian shares. So, there is a role for it in investors’ portfolios. However, right now the slump in property prices in some cities is bad news for investors given that rental yields are often just 1-2% after costs.</p>
<p>Falling rents in Sydney are a double whammy. Add to this uncertainty about tax and it’s not a great time for a property investor. That said, other cities and regional centres offer more attractive rental yields than Sydney and Melbourne and falling prices in Sydney and Melbourne will throw up opportunities at some point.</p>
<p><em><strong>Dr Shane Oliver</strong> is the Head of Investment Strategy and Chief Economist for AMP Capital.</em></p>
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How bad will the housing downturn get? Shane Oliver answers the burning questions

<html><body>
<p>Sydney’s current house price downturn is the sharpest in more than two decades, although the duration is yet to surpass the 2004-06 slump, according to Domain's latest House Price Report.</p>
<p>The report found that for the second time since Domain records began in 1993, house prices have fallen for four consecutive quarters, the only other period this occurred was in 2008. </p>
<p>House prices fell 3.2% over the quarter and 9.9% over the year to $1,062,619. </p>
<p>Unit prices fell 3.3% over the quarter and 5.8% over the year to $702,012.</p>
<p><a href="https://www.propertyobserver.com.au/subscribe" target="_blank"><img src="https://res.cloudinary.com/dz9xllyip/image/fetch/c_scale,w_580,q_auto:good/https://s3-ap-southeast-2.amazonaws.com/po.images/2019/1/1/Strip%20ad%20keep%20up%20in%202019.jpg" alt=""></a></p>
<p>Domain Senior Research Analyst, Dr Nicola Powell said: "Despite the consistent quarterly moderations, the depth of the falls have not gained significant momentum. The pullback in price was anticipated given the stellar run of growth that lasted almost six years. Homeowners reaped an unprecedented gain of 89% over this period.</p>
<p>“Historical performance proves unit prices have a tendency to hold firmer than houses, with slumps being of shorter duration and intensity. Similar to houses, unit prices have also fallen for four consecutive quarters. The latest annual decline the steepest in more than 20 years, taking unit prices back to mid-2016 levels.</p>
<p>“Since changes to macroprudential policies began in late 2014, obtaining a home loan has become increasingly challenging. Although this has resulted in fewer buyers, it has removed the loans written on thin grounds. Having met more stringent lending standards, those who are active in the market are ready to transact.</p>
<p>"Astute investors, who are able to secure finance, may start to look to Sydney as they hunt for the right opportunity to purchase under softer market conditions. Educated investors will continue to take a careful approach, even with the 30% growth cap on interest-only loans lifted.</p>
<p>“Affordability is improving in the harbour city. First home buyers have fewer investors to compete against, greater choice and a wider window to make their purchase. This also provides opportunity for the upsize buyer. It may mean selling at a lower price point compared to the boom, but if buying and selling under the same market conditions, it is likely to be offset by a more affordable upsize purchase.”</p>
<p><img src="https://www.urban.com.au/images/2019/1/23/Domain%20Q4%20Syd.JPG" alt=""></p>
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