Australian home prices have fallen for 10 months, but this economist warns the worst is yet to come

iStockBlue sky ahead! Oh, wait.
  • Australian home prices fell faster, and in more locations, in July.
  • Capital Economics says the worst of the declines are still to come, suggesting they’ll likely get larger before they get smaller.
  • It says the acceleration in the housing downturn last month should “make the RBA and some other analysts sit up and take notice”.

Australian home prices fell faster, and in more locations, during July, suggesting weakness in Sydney and Melbourne is now starting to impact values in other parts of the country.

According to CoreLogic’s Hedonic Home Value Index, Australia’s median home price fell 0.6% to $554,263 last month, the largest percentage fall in close to seven years.

The acceleration, significantly faster than the 0.2% decline reported in June, left values down 0.9% over the past three months, and 1.9% over the year.

The annual decline was the fastest in six years, largely reflecting that prices in Sydney and Melbourne have both fallen over this period, dropping 5.4% and 0.5% respectively.

In the past three months alone, Melbourne’s median price has fallen 1.8%, outpacing a 1.1% slide in Sydney. Three of Australia’s remaining six capitals — Perth, Darwin and Canberra — as well as prices in regional areas, also fell over this period.

Some, such as AMP Capital Chief Economist Shane Oliver, think the Sydney and Melbourne-led price unwind is just getting started, forecasting that prices in both cities are likely to fall by another 10 to 12% over the next couple of years, continuing the measured pullback after years of unrelenting growth.

Paul Dales, Chief Australia and New Zealand Economist at Capital Economics, shares a similar view to Oliver, suggesting his “relatively bearish” forecast that prices will gradually fall by 12% from peak to trough is “starting to look a bit optimistic”.

Based on the latest data provided by CoreLogic, Dales thinks the worst is yet to come.

“Prices in Sydney fell by 0.8% in July after seasonal adjustments, and are 5.4% below their peak and falling at a three-month annualised rate of 6.6%,” he says.

“In Melbourne, prices dropped by a larger 0.9% in July and for the first time since November 2012 the annual growth rate turned negative.

“Prices in Melbourne are still only 3.0% below their peak, but they are now falling at a three-month annualised rate of 8.3%.”

So the declines are getting steeper, a trend that Dales believes will continue.

“Most worrying is that prices will soon be falling at an even faster pace,” he says.

“The further decline in the number of home sales in March — the latest month of reliable data — to a seven-year low was larger than the fall in the number of new listings.

“In other words, demand is deteriorating at a faster rate than supply is improving.

“That suggests house prices in the eight capital cities will soon be falling by 5% a year.”

The chart below from Capital Economics shows the ratio of capital city sales to new property listings on a three-month moving average basis, overlaid against annual changes in capital city home prices. The former has been advanced by eight months to show the relationship between the two measures.

Capital Economics

While not a perfect relationship by any stretch, it’s not the only housing indicator pointing to further price weakness ahead.

Auction clearance rates in both Sydney and Melbourne remain entrenched below 60%, typical with levels that have seen property prices fall in the past. The lower proportion of cleared sales also suggests there’s still quite a gulf between what prices buyers can or willing to pay compared to vendor expectations.

The gradual rollout of tighter lending standards has undoubtedly been a factor, limiting the amount borrowers can obtain to fund their property purchase.

In cities such as Sydney and Melbourne, where house price to income ratios are significantly higher than other parts of the country, these income-based restrictions have contributed to larger price declines than the national average.

The question now is whether these restrictions will be relaxed, allowing borrowers to “pay up” for more expensive property, or will they be tightened further, pointing to the likelihood that it will be vendors that will have to lower their price expectations in order to achieve a sale.

Dales thinks on the scale of probabilities, it will likely be the latter.

“There is still a big risk that the Royal Commission investigation into the banks results in a further tightening in lending standards,” he says.

Adding to downside risks for prices, Dales says the full effect of recent small increases in mortgage rates by some lenders, and the tightening in credit criteria by all lenders, has yet to be truly felt.

Given the recent trends, and likelihood of larger price declines ahead, Dales says there’s not an insignificant risk that weakness in the housing market will spillover into the broader Australian economy.

“The acceleration in the housing downturn in July should make the RBA and some other analysts sit up and take notice,” he says.

“The danger is that house prices fall too far, too quickly and undermine economic growth in the near-term. The RBA hasn’t said exactly what it is expecting to happen to house prices, but we’d bet that prices are falling faster and further than it anticipated.”

At its July monetary policy meeting, the RBA expressed little concern over recent developments in house prices, simply noting they had fallen “moderately in Sydney and Melbourne following significant growth over preceding years”. It added they had been “little changed over the preceding six months in other cities on average”.

While the housing market slowdown has been deliberately engineered by the RBA and other members of Australia’s Council of Financial Regulators to help address what were growing financial stability risks for households and lenders, one has to wonder how far prices have to fall before the RBA publicly expresses some concern?

We’ll hear plenty from the RBA in the coming days with its August monetary policy statement, its quarterly statement on monetary policy, as well as a speech by Governor Lowe, all arriving next week.

Given recent information received, markets are likely to be alert to any hints of increased concern.

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