House prices to fall by 15% by 2020

The general consensus among the 15 economists surveyed by Bloomberg is that Australia’s property market downturn will last for at least another two years, fuelled by stricter lending standards and nervous buyers, which has been similarly predicted by other economists.

House prices in Sydney are expected to drop by 6.5 per cent to 15 per cent (median of 10 per cent) in the coming years, compared to estimated price falls of 2 per cent to 15 per cent (median of 8 per cent) in Melbourne.

Across Australia, economists predicted house prices to decline by 3 per cent to 12 per cent (median of 5 per cent).

By comparison, ANZ Research in June predicted a cumulative 6 per cent decline in nationwide home prices throughout 2018 and 2019.

“Sydney and Melbourne are expected to be the primary drivers of this fall as their high housing prices and highly leveraged households will be more sensitive to tighter credit conditions and rising interest rates,” ANZ Research senior economists Daniel Gradwell and Joanne Masters said.

“ANZ Research forecasts both cities will see prices fall around 10 per cent peak to trough, with Sydney faring slightly worse than its southern peer.”

Of the 14 respondents to Bloomberg’s survey that provided an estimated time frame for price rebounds, three believe Sydney house prices will start picking up in less than two years, with the rest to take longer.

Four economists had similar views on the Melbourne property market, expecting an uptick in prices by 2020, while five respondents said they expect nationwide house prices to bounce back within two years.

However, according to the Bloomberg survey, most economists expect prices to plateau, rather than rise, after 2020.

Sally Auld, chief economist for Australia at JP Morgan Chase & Co, told Bloomberg: “Given regulators’ desire to see stability in the house price-to-income and debt-to-income ratios, we think it will be some time before house prices start to move again.”

Many other analysts have come to similar conclusions (though different figures), saying that the acceleration in house prices over the last decade is unlikely to be replicated in the near future due to high levels of household debt, growing financial stress, subdued income growth, rising wholesale funding costs and stricter lending standards.

In May, UBS stated in a report that the banking royal commission’s “rigorous interpretation” of responsible lending is resulting in banks more critically assessing borrowers’ incomes and living expenses, which will continue to impact credit availability.

It also cautioned in a separate report to its customers that a tightening of mortgage lending standards will have a “material impact on the economy”, noting that property prices are not dictated by the demand for and supply of housing, but rather the demand for and supply of credit.

AMP Capital chief economist Shane Oliver told Mortgage Business that while recent price declines in Australia’s housing market are “modest”, investors could be spooked into selling their properties in tandem with other nervous investors if prices continue to fall, potentially triggering a housing market crash.

The chief economist, who predicted that house prices will further decrease by up to 15 per cent in response to significant growth in the last decade, described the would-be snowball effect as “reverse FOMO” (fear of missing out), making reference to the sharp influx of property investors who sought to take advantage of the booming housing market over the last few years.

According to CoreLogic’s latest Property Pulse report, Australian home values increased by a total of 43.9 per cent since June 2008, with combined capital city price growth of 52.6 per cent, and 16.6 per cent growth across the country’s regional markets.

However, National Australia Bank chief economist Alan Oster told Mortgage Business that he was not concerned by claims of nationwide weakness in the housing market.

“Clearly, APRA has slowed the demand for investor credit, but at the same time, owner-occupier, particularly first home owners, have sort of picked up the slack,” Mr Oster said.

“[APRA has] changed the composition of credit between [investor and owner-occupied], and the big markets like Sydney and Melbourne are basically investor-driven, so of course, you’ve had a bigger impact there.”

Mr Oster continued: “Sydney markets from peak to trough are around 4 per cent down, and Melbourne’s about 2 per cent down, but if you go from the previous trough to where we are now, they’re 40 per cent up.

“I don’t really see a big crunch in house prices going forward. [What] we’ve got is actually a postcode issue, not a systemic issue.”

Additionally, the Reserve Bank of Australia maintained a positive attitude on slowed credit and housing market conditions.

“Housing credit growth had declined, mainly because investor demand had slowed noticeably,” the central bank’s minutes read.

“Lending standards were tighter than they had been a few years previously, and the Australian Prudential Regulation Authority’s supervisory measures were helping to contain the build-up of risk in household balance sheets.

“Some further tightening of lending standards by banks was possible, although the average mortgage interest rate on outstanding loans had been declining for some time.”

[Related: Analysis: How LVR limits helped de-risk the NZ mortgage market]

Tas Bindi is the features editor on the mortgage titles and writes about the mortgage industry, macroeconomics, fintech, financial regulation, and market trends.  

Prior to joining Momentum Media, Tas wrote for business and technology titles such as ZDNet, TechRepublic, Startup Daily, and Dynamic Business. 

You can email Tas on: This email address is being protected from spambots. You need JavaScript enabled to view it.