In my three decades of property experience I have not before seen so many factors that are contributing to the current price correction. Usually it’s a single event, such as a spike in interest rates or unemployment, a rise in oil prices or a commodity price crash.
This time we have political uncertainty, a fear of change to negative gearing and CGT policy, credit tightening by the banks, an oversupply of new and off the plan apartments, valuation settlement risk, a sharp decline in dwelling commencements, buyer sentiment and confidence at an all-time low, foreign buyers have exited the market caused in part to changes in FIRB rules, additional stamp duty charges and changes to withholding tax, major lenders have stopped new lending to self-managed super funds to buy property, borrowers buying capacity has fallen by 20-25% and finance approvals have fallen by 10%.
Governments need to be clear with their direction. This uncertainty does no favours for the property market that relies on the availability of finance, which is the oxygen that fuels our market. On the flip side we still have low unemployment, the lowest interest rates since the 1960's, strong population growth, solid government spending and investment in infrastructure.
Where’s the market really at?
A way to measure where the market is at is through clearance rates. Clearance rates around 60% usually represent a balanced market, and between 55%-58% a price fall of 2-3%, 50%-55% a drop of 3%-5% and 45%-50% a drop of 5%-8%. At the moment we are currently sitting on a 9% price drop for houses in Melbourne and approximately 11% in Sydney.
It’s important to remember that markets operate in cycles, and over my career I have seen our market fall down and back up many times. Keep in mind that prices in Melbourne had risen 44% in the 5 years, from May 2012 to November 2017, and 77% in the 10 years to November 2017. In this context, we are hardly falling off a cliff. Property must be viewed at as a minimum 10-year investment. There will always be rises and falls.
The correction we are currently experiencing is necessary and will help many people, particularly first home buyers, to enter the market and drive affordability. It is difficult to predict how much more prices will drop, but I expect that we will see a further drop of 4%-5% in 2019, followed by a fall of approximately 3%-4 % by the middle of 2020. Top to tail I expect the fall to be no more than 15% to 20%.
A few things will protect the fall
Interest rates could fall further before they start to rise, which will help the property market. The government will also have to consider stimulus in the form of grants or incentives to attract developers/investors back into the market.
Population growth and strong labour markets are other positives, as is strong infrastructure spending. An expected lower Australian dollar is going to make us look very attractive to foreign buyers. Importantly the acute shortage of housing will protect housing prices from collapsing. When funding returns to the new norm, I believe our property market will recover quickly.
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