Market comment: That sinking feeling as prices head south

Thu, 16 Aug 2018

Market comment: That sinking feeling as prices head southIt’s a bit like watching a sinking ship. The prices of Sydney property are going down, and from the surface we can see the hull going under. But how low it will go before it finally settles is hard to predict, and property analysts are coming up with a variety of forecasts.

As we reported last month, the ANZ Bank was the first major financial institution to predict a fall in the market of about 10 per cent from their late-2017 highs. Now the National Australia Bank has followed suit, saying houses will drop another 3.7 per cent this year, with units also dropping but by just 1.4 per cent.

According to the latest Corelogic Hedonic Home Value Index, Sydney’s prices have dropped 5.4 per cent for the year, prompting Corelogic head of research Tim Lawless to comment: “We can't see any factors that may halt or reverse the housing market’s trajectory of subtle declines over the second half of 2018."

Interestingly, the falls seem to have been felt more in higher-income areas including the east, the upper north shore and the inner west where prices have dropped as much as 12 per cent, while lower-income areas including the south-west and the central coast have been less affected.

“I think it reflects a combination of those areas being among the most popular. During the boom they were the key beneficiaries,” Dr Shane Oliver, AMP Capital’s chief economist told Domain’s Tawar Razaghi. “That’s where investors played a bigger role in the boom times, therefore those areas have become more vulnerable when the market has turned down again.”

Another surprise is that apartment prices have fallen just 3.5 per cent, which means they performed better than houses, contradicting earlier predictions that the huge number of apartment towers now rising into the city's skyline would cause a housing glut.

Domain’s Dr Nicola Powell tells us that houses are now taking an average of 62 days to sell and units 64 days, spending respectively 15 and eight days longer on the market compared with last year.   She also says that this extra time on the market is affecting prices. During the first three months of the year on average the median house price dropped $344 daily and $38 a day was shaved off the median unit price.

Capital Economics’ Chief Australia & New Zealand Economist, Paul Dales said warned that the worst is yet to come: "Our relatively bearish forecast that prices will gradually fall by 12 per cent from peak to trough is starting to look a bit optimistic."

There’s a genuine ‘perfect storm’ battering the Sydney market at this time: low wages growth, tightened lending criteria by major banks, fears of a possible interest rate rise, conversion of many existing mortgages from interest-only to principal and interest loans, withdrawal of overseas buyers and the simple fact that prices have risen to levels that have proved unsustainable.

So, yes, it’s stormy seas ahead for a while, and property prices show few signs of bottoming out just yet. But if history is any guide to the future, and it usually is, we know that eventually the market will first stabilise, then recover. It’s all a question of timing.

If it’s any consolation, house prices around the world are falling, and there are many reasons for the slide. Prices in London are falling as fears grow about the impact of Brexit, a slowing economy and high prices.

China's clampdown on an overheated property market has halted sales and sent values into a tailspin. New homes there are now being offered for less than existing homes by some developers. In New York, home sales in the city’s most expensive borough have fallen for three straight quarters, as fears grow that home prices climbed too high and too fast.

Ten years ago, in August 2008, the Sydney property boom of the mid-2000s was coming to an end and prices were dropping fast, causing some market watchers to express their concerns which included worries about a plummeting share market and high interest rates that stifled borrowing.

At that time in this column we said: “Sydney real estate has consistently outperformed most other forms of investment in the long-term. There will always be boom times as there will be periods of slow or even negative growth, but the graph has always eventually turned upwards.” And so it did.

We are now without question in a period of negative growth. There are some forces in play that will ensure it probably stays this way to the end of 2018 before we begin to see an upwards turn in the graph. A period of stability is what we are now waiting to see.

Interest rate fears

Banks are becoming more competitive in their quest for depositors’ funds. Analysis by interest rate comparison website Canstar shows there is a trend toward banks paying higher retail term deposit rates in recent months, according to anaging director of Curve Securities Andrew Murray.

"In the wholesale space where banks are looking for specific dollar amounts and are willing to pay up, we are seeing rates that we have not seen for a number of years, all across the curve. That will eventually flow through to the man in the street in terms of their deposit rates, and also the man in the street in terms of their mortgage rates. It's almost unavoidable," he said.

As lower interest rates generally stimulate the property market, higher interest rates tend to pull it back. Canstar group executive Steve Mickenbecker says this can be good news for some: "The overwhelming conclusion is that bank funding costs are on the rise. Good news for savers and self-funded retirees, but not such a good sign for home loan borrowers. Whatever the RBA does, home borrowers should be expecting to see rate increases from their lender."

One independent analyst told David Taylor on ABC Radio National that up to one million households could be at risk of mortgage default if the big four banks raised interest rates by as little as 0.15 percentage points: "I think that by September we will see these rate rises in place, unless the international financial markets change direction quickly," said Digital Finance Analytics principal Martin North.

"The pressure is building, and it will continue to build. We're going to see the Federal Reserve raising rate further in the US. We've seen the funding costs really not adjusting back very quickly, so I think they've probably got to do something."

Queensland Investment Corporation's director of research, Katrina King, explained to David Taylor that the banks are facing increasing pressure from shareholders to maintain their profit margins, and that means they will raise their rates soon: "I think that they do have to listen hard to their equity investors, and with their cost of funding increasing, this may be some way to alleviate the pressure on their net profit, and the expectations for their profit, and be able to reward their shareholders," she said.

Meanwhile, despite economic growth above three per cent and unemployment at 5.4 per cent the Reserve Bank has kept its rate at the record-low 1.5 per cent rate set in August 2016, almost two years ago.

ANU economist professor Warwick McKibbin has criticised the RBA for “talking itself into a monetary policy dead-end” and urged it to prepare Australian households for a rising global interest rate environment through an official hike of at least 25 basis points.

"If the argument is 'we can't raise rates because if we do we could make the housing market a lot worse’ or prick some other asset bubble and cause a shock – if that's the problem – it's better to raise rates now than wait six months," he told the Australian Financial Review.

"The bank has backed itself into a position where it's justifying where interest rates are based on inflation, and inflation is stubbornly low. So, it continues to do the monetary policy injection, which in my view is driving up asset prices," he said. "But it leaves them in a problematic situation where they have to raise rates when global rates are rising."

Jason Murphy, an economist who writes for, says the RBA is ‘stuck in the middle’: “It would like to cut rates to encourage inflation and wages growth, but it can’t because that would raise house prices. It would like to have raised rates to curb house prices, but it can’t because that would kill wages growth and inflation,” he said.

Crackdown on lending

The banking regulator ASIC has recently claimed success on its measures to cool excessive demand for investment and interest-only loans. Although the royal commission into banking isn’t due to report for another two months, it’s likely that banks will be told to set higher standards for lending and take greater care in determining households’ actual living expenses.

This clampdown will affect the ability of would-be buyers to enter the housing market, which will take some of the pressure off the RBA to adjust its prime rate. Younger people will be the most affected, although tighter lending standards will serve to prevent them from becoming overextended and facing financial disasters when interest rates eventually rise.

Morgan Stanley Research tells us that Australians will be able to borrow $30,000 less to buy a home as a result of the banks’ tighter lending practices. The size of the average new loan is expected to fall about eight per cent, from $379,000 down to $349,000, as banks specifically target high-risk loans.

IFM Investors chief economist Alex Joiner told Domain: “The scrutiny that the retail banks have been under from the royal commission, and these regulations from APRA, certainly mean that it’s a different conversation a mortgagee is having now when they step into a bank than they might have been, previously,”

Investor lending has certainly pulled back with figures from ABS showing that lending has dropped to its lowest level since January 2016. The latest mortgage lending data shows that investor loans weakened by a further 0.9 per cent in seasonally adjusted terms in April 2018 and now sit at $10.7 billion.

This fall has been somewhat offset by an increase in first-home buyers which reflects lessened competition from investors, but there is still less money coming into the property industry now than there was two years ago, according to Tim Reardon, principal economist for building lobby group the Housing Industry Association.

“The increase [in the] first-home buyer’s market is around a third of the value of the decrease by investors. That’s less money coming into the industry than what there was investing,” Mr Reardon said.

“That’s a significant reduction in the value of investment coming into the housing market, which does have significant impact on the number of homes being built,” he said. “Any reduction means fewer homes being built which exacerbates housing affordability.”

Construction falling

Forecaster BIS Oxford Economics is predicting the biggest correction in housing starts since the global financial crisis hit in 2008, with the number of starts set to fall by almost 23 per cent by 2020.

BIS associate director Adrian Hart told the ABC's AM program that the slump would be led by a cutback in high-density dwelling construction: "What we're seeing is that what goes up tends to come down. It is a bust in residential apartments in the high-density segment. But you have to look at how far it's come up," Mr Hart said.

"You can see that house prices have stagnated, and that price effect is really going to start influencing investor behaviour on top of all the policies which have been trying to keep the speculative element of the housing market under control."

Noting that the recently-ended construction boom was fuelled by the purchase of apartments by investors, Mr Hart said that residential commitments in Sydney would fall by 26 per cent over the next two years.

"Land prices have spiked in Sydney and Melbourne in recent years, pricing many people out of the market for new houses, " Mr Hart told ABC News. "This (the correction) will act as a disincentive for new house building and pull buyers towards the established dwelling market."

When will this slump end?

It’s all guesswork at this stage because nobody can forecast an end to the present slump without making some pretty broad assumptions. A Bloomberg survey of 15 economists turned up a consensus expectation that the slump will last at least another two years, not ending until at least 2020.

Of course, all these economists have their own opinions, which is the usual way with members of their profession. Three of them forecast falls of 15 per cent in Sydney, while two saw declines of less than seven per cent.

Only three believed prices will rise again in less than two years, and most of those surveyed felt that 2020 would see prices stabilise rather than rebounding. Sally Auld, chief economist for Australia at JPMorgan Chase & Co, said: “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."

A former ANZ Bank economist, now at Macquarie Bank, Justin Fabo, released his own note on home prices, forecasting a peak-to-trough fall in Sydney of about 10 per cent, leading national falls of between 4-6 per cent over the next couple of years.

According to Domain Group data, prices are now about two per cent below their December 2017 peak, but the downturn could be as little as one-sixth of the way through. Or it might be as much as halfway there, depending on which economist you ask. But all agree that a house price resurgence won’t happen until more value is wiped off Sydney’s median prices.

As happens when there’s a 180-degree turn in the cyclical housing market, conditions have swung so they now favour buyers after years of favouring sellers. Buyers no longer experience ‘FOMO’, or ‘fear of missing out’, and now it’s the vendors who have to ensure they price their offerings realistically to make a sale.

Domain’s Dr Nicola Powell gets the last word this month: “It will be the vendors who understand this new selling environment who will succeed in securing a timely sale. Meanwhile, buyers will be welcoming this change; it presents an opportunity, providing time to ponder a purchase decision and negotiate the price.”


‘Housing powder keg ready to blow,’ Jason Murphy,, 24 June 2018
‘Australia’s house price outlook worsens: NAB, ANZ,’ Chris Kohler, Domain, 12 July 2018
‘Falling prices, no tenants, the worst is yet to come for Sydney housing market,’ Su-Lin Tan, Australian Financial Review, 2 August 2018
‘Bank battle for savers to lift deposit and mortgage interest rates,’ Clancy Yeates, Sydney Morning Herald, 1 July 2018
‘Brake on Australia's addiction to property has come just in time,’ Jessica Irvine, Sydney Morning Herald, 16 July 2018
‘Investor and owner occupier (excluding first home buyers) was down again in the latest ABS figures,’ Tawar Rasaghi, Domain 13 June 2018
‘Sydney housing slump to last until at least 2020, say economists,’ Emily Cadman, Kimberley Verschuur & Cynthia Li, Sydney Morning Herald, 19 July 2018
‘Building approvals rebound as property sector shows resilience in the face of the property slow down,’ Stephen Letts, ABC News online, 1 August 2018
‘Construction set for its biggest fall since the global financial crisis,’ Peter Ryan, ABC News online, 24 July 2018
‘Prepare Australians for rate hikes now, Warwick McKibbin tells RBA,’ Jacob Greber, Australian Financial Review, 24 June2018
‘House price debate goes from if they'll fall to by how much,’ Michael Janda, ABC News online, 21 June 2018
‘Is the bottom about to fall out of our $6.9 trillion property market?,’ Jessica Irvine, Sydney Morning Herald, 21 July 2018
‘Australia’s property price correction still has some way to go,’ Chris Kohler, Domain, 26 July 2018
‘New bank mortgage loans to fall 8 per cent amid APRA, royal commission crackdown,’ Chris Kohler, Domain, 20 June 2018
‘Home buyers must keep their cool,’ Editorial, Sydney Morning Herald, 26 July 2018
‘Why properties are taking longer to sell in Sydney (and what that means for you),’ Dr Nicola Powell, Domain, 1 July 2018
‘Up to 1 million households 'on the edge' of mortgage default by September, analyst warns
RN Breakfast,’ David Taylor, Radio National, ABC 11 July 2018
‘Sydney’s inner west bears the brunt of the city’s steepest annual drop in house prices,’ Tawar Razaghi, Domain, 28 July 2018