The recent decline in Australian house prices has been led by the major east coast housing markets.
The latest CoreLogic data showed annual price falls in Sydney reached 2.1% by the end of March, while Melbourne had a 0.5% quarterly drop but is still up 5.3% for the year.
While price falls in Sydney grabbed most of the headlines, Paul Dales from Capital Economics says Melbourne is more vulnerable in the near-term.
Dales based his view on the sales-to-new-listings ratio, which he said is the best measure of housing supply and demand.
In addition to forecasting price pressures in Melbourne, Dales said the number of new units being listed for sale is higher than the number being sold — and that indicates apartment prices could fall faster than detached dwellings.
Dales said the ratio indicates that Sydney prices could rebound from -2.1% to flat annual growth over the next six months.
And that increase will be driven by detached homes, where Dales’ indicator is forecasting a turnaround from -3.8% to +6%.
“In contrast, it appears as though the slowdown in Melbourne has much further to go as overall house price inflation there could fall from +5.3% in March to around -5.0%.”
And based on the ratio of sales-to-new-listings, falls in Melbourne apartment prices are forecast to be even sharper — from annual growth of 6.6% in March to falls of around 8% over the next six months.
Despite the negative near-term indicators for Melbourne’s apartment market, there was a huge increase in Australian building approvals last November — driven by a surge in Melbourne as a swathe of large apartment developments were given the go-ahead.
And that was likely in response to Victoria’s booming population growth, which is easily outpacing every other capital city in the country.
Dales added a couple of caveats to his analysis. Firstly, using the sales-to-new-listings ratio for each capital is less statistically robust due to a smaller sample size.
He added that more broadly: “the relationship between the sales to new listings ratio and price inflation in Melbourne hasn’t been very close in recent years”.
But he concluded that in the outlook for Australian house prices over the next six months, investors should be particularly cautious about apartment prices, while Melbourne looks to be the most vulnerable among Australia’s eight capital cities.