Here's a model that aims to predict what Australian home prices may do next

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  • Australian home prices have fallen in recent months, led by weakness in Sydney and Melbourne.
  • Capital Economics believes it has created “the best single indicator of the health of housing” in Australia.
  • Current trends point to further declines in units but a rebound for house prices.

Australian home prices are falling, largely reflecting recent weakness in Sydney and Melbourne, the nation’s largest and most expensive markets.

The question everyone is now asking is whether recent trends will continue?

Some think the declines will last for some time yet while others think we’ve already seen the nadir in the current market downswing with prices tipped to begin climbing once again.

Given Australia’s housing market is valued at a smidge under $7 trillion, according to recent data from the ABS, and therefore the largest store of wealth for the majority of Australian families, there’s understandably a lot of interest as to what the future holds.

And that’s even before Australian bank stocks, another asset closely tied to the performance of the housing market, are taken into consideration.

After tinkering with various housing market indicators, Capital Economics thinks it knows the answer to what prices are likely to do next.

Using new property listings and sales data from CoreLogic, the group believes it has created “the best single indicator of the health of housing”, suggesting it provides a pretty strong guide as to what’s going to happen to prices over the next few months.

Right now, Paul Dales, Chief Economist at Capital Economics, suggests annual price growth is likely to turn negative in the not to distant future.

Source: Capital Economics

“The ratio of sales to new listings has been a [good] predictor of house price inflation,” he says. “At the moment, this suggests that house price inflation will soon drop below zero.”

While Dales admits the measure isn’t perfect, acknowledging that it didn’t predict the extent of the rebound last year that was helped by interest rates cuts from the RBA delivered in mid-2016, it’s clear that the indicator has a fairly solid relationship to annual changes in prices.

And if that trend reasserts itself, Dales says the upcoming losses are likely to be led by the apartment sector.

Source: Capital Economics

“The sales to new listings ratio for units suggests that unit price inflation could yet fall from 2.6% in March to [a decline of] around 6%,” he says, pointing to the chart below showing the indicator against price movements for apartments.

In particular, Dales says the indicator points to losses in Sydney and Melbourne unit prices in the period ahead.

In contrast, however, Dale says recent weakness in house prices — which have underperformed units in recent months — may actually reverse in the months ahead.

Source: Capital Economics

“The single-dwellings sales to new listings ratio suggests that [house] price inflation may soon rebound from 0.2% in March to around 5% by August,” he says.

The view presented by Capital Economics largely mirrors the broader analyst economist community with the vast majority expecting house prices to outperform units in the period ahead, an outcome partially reflecting significant supply additions in the latter.

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