Australia's housing downturn spreads

Cameron Spencer / Getty Images
  • Australian home prices have fallen 2.7% over the past year, according to data from CoreLogic.
  • The decline in the national measure largely reflects weakness in Sydney and Melbourne, Australia’s largest and most expensive housing markets. The most expensive homes in these cities, in particular, have seen the steepest falls.
  • New analysis from Morgan Stanley suggests values are now starting to fall in more affordable price ranges.

Australian home prices have now fallen for 12 consecutive months, a result largely reflecting weakness in Sydney and, more recently, Melbourne.

Prices in these cities — the largest and most expensive in Australia — have fallen 6.1% and 3.4% respectively over the past year, with declines accelerating in recent months.

The declines have been even more steep in more expensive categories with properties in the top 25% of valuations falling by 8.4% in Sydney, and 6.7% in Melbourne, over the past 12 months.

However, more affordable homes in these cities, and in other smaller capital cities and regional areas, had largely avoided the downturn seen in more expensive price segments.

Up until recently, that is.

After leading prices higher in the prior upswing, it now appears that weakness in the top end of the market is now starting to filter through to prices at the lower end of valuations.

The chart below from Morgan Stanley’s Australian equity strategy team certainly suggests it is.

Morgan Stanley

On a three-month annualised basis, prices in the bottom 25% of valuations nationally have recently started to fall, lagging the move seen in homes at higher valuations before them.

“An interesting feature of the price declines so far is that they have been almost entirely quarantined in the top quartile of most expensive properties – prices in the bottom quartile were growing right through the first half of this year,” Morgan Stanley says.

“However, over the past few months the price weakness has broadened out into the other segments, with all tiers declining in price for the first time since 2011.”

Morgan Stanley

Nationally, it found that prices in the lower quartile of valuations have fallen 1.9% on a three-month annualised basis, led primarily by weaker apartment prices, especially in Sydney.

While not to the same scale of the declines seen in the middle 50% and top 25% of valuations, Morgan Stanley says weakness at lower end of the market has negative implications for both the length and economic impact of the current downturn.

“These developments are negative for the housing outlook,” it says.

“The price of less expensive housing tends to be less volatile, and price falls much rarer.”

Morgan Stanley says this not only points to “more persistent weakness in the property market” but also the potential for reduced household spending given the impact on household wealth levels.

“Spending of owners of housing in this segment are likely to be more sensitive to prices, given that lower income households tend to hold less savings buffers,” it says.

“This suggests we may begin to see signs of wealth effects from housing in the latter half of the year.”

That theory could be put to the test as soon as Friday when the ABS releases Australia’s retail sales report for August.

After a strong June quarter sales were unchanged in July, creating renewed concern that recent weakness in the housing market could be impacting consumer behaviour.

Economists don’t think that will be evident in the August data with the median forecast looking for a modest rebound of 0.3%.

However, should another weak result occur, it will only add to nerves about a potential housing-led spending slowdown in the second half of the year.

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