Most property cycles in recent years have seen the Sydney market recover pretty quickly after a period of price correction. For a time, people don’t want to sell their houses in a falling market and buyers hesitate in case the prices are going to go lower, so the whole market turns quiet before it regathers, and then the next upwards cycle begins.

Appearing before a parliamentary committee in Canberra, Westpac chief executive Brian Hartzer described the current market correction as a “cyclical adjustment after six strong years of growth, that so far regulators and banks are managing reasonably well”.

He added: “We see this as a natural response to a recent increase in the supply of housing, along with a fall in foreign investor demand and increased uncertainty about future returns from housing investment after a significant run-up in prices.”

One outcome is that there has been a dramatic increase over the past year in how long properties are taking to sell. More than 83 per cent of all properties in Sydney have been on the market for more than 60 days, an increase of almost 10 per cent on 2018.

Domain’s Kate Burke writes that Sydney home owners across Sydney are cutting prices at a rate not seen in a decade in response to mostly negative predictions for the state of the housing market.

“The average discount on initial prices is 8.2 per cent, or $87,134, for houses and 8 per cent, or $56,160, for apartments. House sellers have not discounted at this level since January 2009, while apartments have not had discounts like this since 2006.”

That’s not to say all Sydney suburbs are affected to the same degree. Auctioneer and real estate adviser Robert Klaric, of thepropertyexpert.com.au, says the market has two speeds at the moment: “Blue-chip areas like Manly, Mosman, Bondi, Hunters Hill, have weathered the storm because the stock level is low and because sellers have said, ‘I am not going to put it on the market unless I get a premium’. But any property 15 to 20 kilometres from the CBD is struggling.”

Property researcher CoreLogic says data for January showed Sydney prices were now 12.3 per cent down from their peak in July 2017 - not as fast nor as severe as feared earlier, but the downward direction is still inescapable and the bottom’s not yet in sight.

Projected figures, based on CoreLogic's daily price index over February, indicate a "moderate slowdown" in the falls recorded from the previous two months, according to Cameron Kusher, research analyst at CoreLogic.

"It's slowed moderately, and we've been of the opinion you won't continue to see those types of monthly falls over the next year," Mr Kusher said as he delivered one of the few traces of optimism in recent weeks.

In times like these the doomsayers come out of their caverns and vie with each other for the most shocking prediction of the price correction’s outcome. One such prediction comes from LF Economics founder Lindsay David who anticipates a ‘property bloodbath’ and says Sydney prices could fall by up to 25 per cent in calendar 2019 alone.

“We think there’s a chance property prices could fall by half in Sydney and Melbourne over the long run,” Mr David said to News.com’s Frank Chung. “I wouldn’t be surprised by falls of at least 40 per cent. When all hell breaks loose you’ve only got so many buyers out there.”

Other experts are less pessimistic. Tim Lawless, the head of research at CoreLogic, expects a peak-to-trough fall of up to 20 per cent for both Sydney and Melbourne before prices start to level out in 2020. "There's not as many buyers around which simply means the rate of absorption is quite low,” he told the ABC’s 7.30 Report.

"While new listings are tracking really low, particularly compared to a year ago, the total number of homes being advertised for sale is actually really high. It's the highest level we've seen since 2012, which was the last time the housing market was in a downturn," he said.

"I don't think we're at the bottom of the market just yet. We're not seeing any evidence that the market's about to turn around, we're not seeing any evidence that credit is about to loosen either. All the credit flows data that's publicly available through the RBA or through the ABS statistics is showing a fairly dramatic and consistent decline."

As Mr Lawless suggests, there’s little to smile about in the latest lending statistics from the Australian Bureau of Statistics. They show new lending to owner occupiers fell 6.4 per cent during December 2018, outpacing the decline in lending to property investors which fell by 4.6 per cent. The total value of new lending to households has dropped 19.8 per cent in the past year which is the biggest annual fall in home loans since the global financial crisis.

Banking on a rate cut

The Reserve Bank (RBA) has recently cut its key economic forecasts for the next two years as risks to the Australian and global economies grow. The RBA now says it believes economic growth will reach a top of just 2.75 per cent in 2020; this is well down from its forecast of 3.25 per cent growth in its last statement released in November.

One of the primary reasons for this drop is the continuing falls in house prices in Sydney and Melbourne and their impact on the rest of the economy: "The current correction in the housing market is a significant area of uncertainty," the RBA said in its February statement on monetary policy.

"Housing prices nationally had increased by almost 50 per cent over the five years to September 2017, and they have fallen by around 8 per cent since then. The implications of the housing market correction for the broader economy depend on how households respond, including how they take previous price increases into account in their spending decisions."

The RBA says that Australia’s housing correction is the result of four main factors: a drop in foreign buyers, stricter lending practices, a surge in properties on the market and increasingly stretched household incomes.

The RBA’s worry about house prices, and the fact that Sydney’s housing market continues its lacklustre performance, means that financial markets are increasingly convinced the next move in interest rates will be down, with a rate cut to 1.25 per cent expected by 2020, if not sooner.

However, Westpac’s chief economist Bill Evans predicts two cuts in interest rates this year as falling house prices create a “negative wealth effect” that could drag down the whole economy. He says the cuts are most likely in August and November and they would reduce the cash rate to a new record low of just one per cent.

“The decision by the Reserve Bank Board to accept the possibility that interest rates could fall further, despite the current record low levels, is profoundly important. Westpac now expects the Reserve Bank to cut the cash rate by [0.25%] in both August and November this year,” he said.

Investors still here

The ABC’s Philip Lasker says that property investors have been battered by a ‘perfect storm’ of falling prices and tighter credit: “In the heady days of the property boom, as big city house prices jumped ahead in leaps and bounds, investors reigned supreme, swatting away first home buyers with their superior purchasing power.

“It was a win-win for the investing class. They had willing banks and favourable tax laws working for them, pumping up property prices and capital gains in a virtuous circle.”

Mr Lasker said that investors are important players in Australia's property market, representing about 42 per cent of total mortgage demand: “A significant shift in investor sentiment could lead to a serious downturn in the property market with job losses in the labour-intensive construction sector, not to mention the serious knock-on effects to the services such as architects and lawyers, as well as retailers who sell household goods.”

AMP Capital chief economist Shane Oliver said both supply and demand contributed to the overall decline in home lending last year. “The banks have made it harder to get a loan but there’s also less demand for loans. A lot of that weakness is concentrated in investors,” Dr Oliver said.

A decline in investment home loans made up the lion’s share of the home lending downturn, recording a 27.8 per cent drop in the past year: “They’ve lost a bit of interest with the expectation prices are still falling,” Dr Oliver said.

Banking giant UBS has warned that Australia’s falling house prices could be about to plummet even lower still as investors retreat from the market. “While investors corrected from a record more than 40 per cent share in 2015, to 28 per cent now, they remain high globally.”

ABS chief economist Bruce Hockman told Domain: “The slowdown in lending for investor dwellings this month continues the steady decline over the past two years, with the value of new investor loan commitments down around 40 per cent from the peak at the start of 2017.

BIS Oxford Economics managing director Robert Mellor says it’s possible some investors are sitting on their hands awaiting the outcome of the federal election and potential changes to negative gearing, but it was unlikely they would rush back if the current tax settings remained because there was little growth on the horizon.

He added that, for the same reason, if negative gearing were to be scrapped by a Labor government, the impact shouldn’t be significant because investors had less market share than in previous years.

Commonwealth Bank senior economist Gareth Aird says that as prices continue to fall, he expected investors would make their way back to the market as increasing yields would become more appealing: “I’m sure there are some investors sitting on the sidelines, just waiting to see the result of the election [and potential changes to negative gearing],” he said.

CoreLogic's head of research, Tim Lawless, says it’s hard to see investors abandoning the property market just yet because most of them are in for the long haul and the transaction costs are high.

'In any sort of downturn, you would generally see investors riding it out looking for that long-term capital gain and hopefully trying to improve their yield as they pay down their principal," Mr Lawless said.

"And are there better places to put your money? At the moment, probably not."

ASIC gets active

The Australian Securities and Investment Commission (ASIC) has stepped up its battle with the major financial institutions with a 50 per cent increase in the number of investigations of misconduct over the past year. This poses a threat to the banks’ ability to make home loans, one of their biggest sources of profits.

If ASIC loses an upcoming case against Westpac – perhaps going to trial later this year, it says it will ask the government to make changes to mortgage rules that could ultimately make it harder and more expensive for borrowers to get a home loan. The focus of this landmark case is the allegation that Westpac did not give proper consideration to borrowers’ spending habits before approving their home loans.

Any changes to current legislation that force banks to do more work in assessing a loan applicant’s finances would probably mean the process of obtaining a home loan would take longer and be more expensive. It’s also likely that many home buyers might even find it hard to get a home loan under tighter lending rules.

Mark Bouris, founder of Wizard Home Loans and now CEO of Yellow Brick Road, said it was now “particularly hard for mortgage originators and brokers to assist borrowers to obtain an approved home loan”.

“Sentiment surrounding the royal commission, changes in credit approval processes, more intense regulatory oversight and greater compliance requirements and costs have created significant uncertainty.”

“In all the years of being involved in the home loan business, I have never seen such difficult borrowing conditions,” he said in a statement to the Australian Stock Exchange.

There were earlier fears that the findings of the Hayne royal commission would result in far-reaching reforms that would seriously affect the ability of the banks to lend funds for housing.  However, as UBS banking analyst Jon Mott commented: “"While we do not anticipate a loosening of underwriting standards or reacceleration of lending, the soft recommendations of the royal commission final report is a clear win for the banks."

Ben Udy from Capital Economics agrees with Mr Mott: "The final report by the royal commission may add to the changes in bank behaviour that are already underway. The report did not recommend much that is likely to cause an upheaval for the finance industry. We therefore expect credit growth to continue to ease, contributing to the housing downturn and a softening in the wider economy."

What oversupply?

Housing Industry Association principal economist Tim Reardon says that, despite a record number of apartments set to be completed, there is little fear of an oversupply of dwellings and significant further price falls: “While unemployment remains low…and population growth remains strong, the depths of this cycle will be relatively shallow,” Mr Reardon said.

He said that apartments now built will clear relatively quickly as developers hold back until conditions improve. He also noted that apartment approvals data for the December quarter was down more than 33 per cent year on year.

“The rate at which they slowed down at the end of 2018 was a surprise, but now that the credit squeeze has occurred, we expect approvals will continue with a relatively slower, slow down over the next two years.”

Seasonally adjusted, total dwelling approvals were down 8.4 per cent between November and December, but apartment approvals were down 18.8 per cent compared to the same period in 2017. Compared to December 2017, the apartment approvals were down 38 per cent to 4,712 and house approvals were down 11.3 per cent to 9,134. The seasonally adjusted value of total building approvals fell 7.5 per cent.

Urban Taskforce chief executive Chris Johnson has called on the NSW Government to manage the significant fall in apartments being approved for construction, arguing that an undersupply of homes will result in property prices again rising by the end of the year: “There needs to be more management by government to make sure we’ve got a more even approach to the supply of new homes, which then keeps a lid on the dramatic increases in price and equally the dramatic drops in price,” he told News.com.au.

“Because there won’t have been enough supply for a long time, the number of approvals won’t be there. The supply chain will be going up, and therefore there won’t be enough new homes on the market for the population growth, so prices will go back up again.”

Developer Harry Triguboff, who's worth $US9.2 billion ($13 billion), according to the Bloomberg Billionaires Index, plans to keep expanding his operations, even if the Sydney property market continues to fall: "We have our ups and downs and we keep building," Triguboff, 85, said in an interview with the Sydney Morning Herald.

"If prices fall, I'll buy the land cheaper," said Australia's second-richest person. "As long as you don't lose your cool. You have to look at things in the longer term."

Sources:
‘RBA boss Philip Lowe unconcerned about falling house prices, points finger at reduced supply,’ Tawar Razaghi, Domain, 6 March 2019
‘Sydney homes sell prior to auction as market observers warn of reduced buyer pool,’
Chris Tolhurst, Domain, 10 March 2019
‘Westpac says banks not to blame for house price falls,’ Frank Chung, News.com.au, 9 March 2019
‘Yellow Brick Road posts $34 million loss as Mark Bouris warns ‘never seen such difficult conditions,’ Frank Chung, News.com.au, 8 March 2019
‘House price falls 'slow moderately', Ingrid Fuary-Wagner, Australian Financial Review, 1 March 2019
‘Desirable’ property’s dramatic 13 per cent price plunge proof of downturn,’ Alexis Carey, News.com.au, 24 February 2019
‘The mystery paper that could explain Australia's housing slump,’ Daniel Moss, Bloomberg, 20 February 2019
‘Interest rates set to be slashed as jobless rate rises, banks warn,’ David Taylor, RN Breakfast, ABC News online, 28 February 2019
‘Property investors battered by a 'perfect storm' of falling prices and tighter credit,’ Philip Lasker, ABC News online, 27 February 2019
‘There are more properties on the market now than at any time since 2012 — and no-one's buying,’ Michael Atkin and Andrew Dickson, 7.30 Report, ABC News online, 26 February 2019
‘Let the bloodbath begin’: House prices in Sydney and Melbourne ‘could halve’ in worst crash since 1890s,’ Frank Chung, News.com.au, 21 February 2019
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‘Reserve Bank will cut rates twice in 2019, Westpac chief economist says,’ Martin Farrer, The Guardian, 21 February 2019
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‘Summer Hill auction draws crowd of 100 but investors still thin on the ground,’ Chris Tolhurst, Domain, 3 February 2019
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'I'll buy cheaper': Australia's property king is exploiting the slump,’ Andrew Heathcote, Sydney Morning Herald, 15 February 2019
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