‘Stretched’ property market to turn negative, says economist

Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver said property price growth will be weak throughout 2016 before possibly falling into negative territory in 2017.

“I think because the property market has become so stretched, particularly in Sydney, it has been enough to tip the cycle back down again,” Mr Oliver said. “This year we will see weak price growth and then next year we might actually see price declines.”

The chief economist believes house price growth has peaked, and that the wealth effect of rising property prices will begin to weigh on consumer spending for the economy.

“I think it is another cycle similar to those we have seen in the last few years,” Mr Oliver said.

“If you look at Sydney, it had a slowdown in 2005 where prices fell between 5 and 10 per cent in certain areas, then we had an upswing into the run up to GFC, then we had a downswing both in Sydney and Melbourne in 2008,” he said.

“Prices fell in 2009 then we saw an upswing in 2010 into early 2011, then another downswing into the 2012 period and recently an upswing. So we have been seeing these cycles go up and down now for the last decade, starting in Sydney but also in Melbourne. I think we will see another one of them.”

A downswing in the property cycle is usually triggered by monetary tightening, which has been fairly constrained over the last 12 months. However, Mr Oliver noted that the out-of-cycle rate hikes of the banks towards the end of 2015 have dampened sentiment and dramatically shifted expectations.

“One of the reasons that investors have backed right off is that sentiment regarding expectations for home prices has completely reversed,” he said. “It has gone from ‘we’ve got to get in now otherwise we’ll miss out and prices are up 15 per cent per annum and that will continue’ to a fundamentally dented, more cautious sentiment.”

APRA’s lending curbs became more pronounced through July and August last year when lenders started adjusting their mortgage rates and LVR requirements.

Consequently, auction clearance rates started to fall and house price growth slowed towards the end of 2015.

“It’s almost as if someone has slammed the breaks on, particularly in Melbourne and Sydney,” Mr Oliver said.

“However, as the property market cools down in Sydney and Melbourne it does provide some scope for first homebuyers to get into the market.”

[Related: Economist warns property investors as market turns]