Sydney units to bear the brunt as housing market turns

According to the company’s Residential Property Prospects 2018 to 2021 report, a number of factors are increasingly weighing on the residential market. Banks have continued to tighten the screws on investors, reducing their borrowing capacity.

In addition, record new dwelling completions have seen markets either tip into oversupply (or remain in oversupply) or significantly erode any market deficiency that has been in place.

BIS Oxford Economics senior manager and study author Mr Angie Zigomanis said that increased restrictions on investor and interest-only borrowing have reduced the capacity for investors to bid up prices.

“This has caused all markets, with the exception of Hobart, to record a slowdown in price growth performance over 2017–18. Notably, after experiencing strong gains since 2012–13, house price growth is on track to have recorded a negative number in Sydney and Melbourne through the year,” the senior manager said.

Mr Zigomanis pointed out that the unit market is expected to face more challenges than the detached house market in the coming years.

“Moves in 2017 by the Australian Prudential Regulation Authority (APRA) to further constrain growth in investor lending will play a part in this difference,” Mr Zigomanis said.

“In New South Wales and Victoria, in particular, where the strength of investor demand has been a key driver of the Sydney and Melbourne residential markets, respectively, the decline in investor activity has impacted price growth. More downside is forecast for Sydney as it has had a much greater dependence on investors through the most recent upturn.

“Similarly, greater downside is expected in the unit market, which is more reliant on the investor market to drive sales and price growth. Without the same level of investors and without the same growth in new supply, the detached housing market should hold up better compared to units.”

However, outside of any negative shock to the economy or significant rise in interest rates, BIS Oxford Economics is not anticipating any significant correction in house prices.

“Without an increase in the unemployment rate, low interest rates mean investors should be able to meet their mortgage repayments despite potentially having to discount rents to attract tenants,” Mr Zigomanis said.

“Consequently, owners will be able to hold their properties through this weaker period, with few forced sales likely to be taking place to create significant downward pressure on prices.”