In the easing markets of Sydney and Melbourne, we’re hearing more speculation in the media and amongst buyers about how low prices will go as our big cities continue to cool.
The latest opinion came from two senior economists at ANZ Bank, who published a paper last week predicting both cities would see a 10% peak-to-trough fall in prices over 2018 and 2019.
We’re going to hear more of these predictions over the next 18 months, so let me see if I can offer you some reassurance based on my experience of more than 30 years in real estate, during which time I have seen many peaks and troughs in the market cycle.
How far prices will fall is a hard question to answer with any real accuracy. We know both cities are cooling – Sydney faster than Melbourne (but remember, Sydney had a faster rate of growth during the boom).
We also know that neither market is going to crash because there are too many fundamentals holding prices up, such as the undersupply, high population growth largely due to migration, very low interest rates, low unemployment and a strong economy.
But we’re certainly seeing prices paring back, with auction clearance rates falling into the 50% bracket in Sydney and the low 60% in Melbourne.
Given the property market is cyclical in nature, it’s reasonable to rely on history for an indication of how low prices might go.
A Macquarie Bank Sales and Trading note released last week summed it up pretty well: “Australia has had six previous episodes of declining housing prices since 1980, with the peak-to-trough range of 2.5%-8%. Nearly all previous corrections occurred following interest rate rises, a drag unlikely to be repeated any time soon in this cycle.”
In terms of where we are now, the latest CoreLogic data shows Sydney home values have fallen -4.2% since June last year, while Melbourne values have risen 2.2%. But a recent acceleration in Melbourne’s cooling is apparent with an -0.5% decline in values in May and a three month decline of -1.2%, which is its largest fall over a three month period since 2012.
Price movements in both cities are tracked monthly and what we’re seeing so far is a very orderly softening of prices. Sydney has experienced extremely small monthly declines in median values since September last year. Out in the marketplace, you can feel that the heat has gone but it’s not translating into a big drop in the city’s median price.
The great thing about this stage of the cycle is seeing buyers get a bit of negotiating power back. The urgency has gone, competition is weaker, there’s more homes for sale and much less risk of paying a premium at auction. We’re getting back to normal market conditions.
This is a good thing, especially for first home buyers. The timing couldn’t be more perfect for young people in Sydney and Melbourne – they’ve got generous stamp duty concessions; property prices are easing; and there’s far less competition from their investor rivals.
Is a cooling market a bad thing for owners? Of course not. It’s actually extremely positive because market corrections prevent bubbles. We want a period of consolidation now to cement in the significant price gains of the boom.
Put the price falls happening now into perspective. Around this time last year, when we were close to the peak of the boom, Sydney house prices were up 67% and Melbourne house prices were up 40% since mid-2012 when the growth cycle began.
So, even if they fall by 8%-10% or more, most home owners shouldn’t be concerned by this.
At the end of the day, the gains made during the boom will far outweigh any price falls we experience now.
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