Economist calms property crash fears, expects 10% fall in prices

In a recent market update, AMP Capital chief economist Shane Oliver outlined how the popular "property crash" calls have been ongoing since 2004.

With the RBA warning of high household indebtedness, a cooling property market and rising rates, talks of a potential property panic are starting to do the rounds once again.

“To get a housing crash — say, a 20 per cent average fall or more — we probably need much higher unemployment, much higher interest rates and/or a big oversupply,” Mr Oliver said. “But it’s hard to see these.”

Firstly, Mr Oliver noted that there is no sign of recession and jobs data remains strong.

On the rate front, while the RBA is likely to start raising interest rates next year, Mr Oliver said that the central bank is well aware that households are now more sensitive to higher rates and will therefore move only very gradually (like in the US) and wouldn't hike by more than it needs to keep inflation on target.

“Property oversupply will become a risk if the current construction boom continues for several years, but with approvals to build new homes slowing, this looks unlikely,” the chief economist said.

“Don’t get me wrong, none of this is to say that excessive house prices and debt levels are not posing a risk for Australia. But it’s a lot more complicated than commonly portrayed.”

AMP Capital continues to expect a slowing in the Sydney and Melbourne property markets, with mounting evidence that APRA’s measures to slow lending to investors and interest-only borrowers are starting to have an impact.

The investment manager said: “This is particularly the case in Sydney where price growth has stalled and auction clearance rates have fallen to near 60 per cent.

“Expect prices to fall [by] 5 to 10 per cent (maybe less in Melbourne given strong population growth) over the next two years. This is like what occurred around 2005, 2008–09 and 2012.”