Australian house prices fell heavily in May, continuing a familiar pattern seen in recent years.
According to data released by Corelogic earlier today, prices fell by 1.1% in weighted terms across Australia’s capital cities in May, led by steep declines of 1.3% and 1.7% in Sydney and Melbourne.
By type of property, the group said that house prices fell by 0.9%, outpaced by a 2.6% drop in those for apartments.
“The month-on-month fall was largely the result of declines in Sydney and Melbourne, where dwelling values have recorded significant gains over the current growth cycle to date,” said Tim Lawless, CoreLogic head of research, noting that housing market conditions are typically seasonally weak in May.
The group’s Home Value Index is constructed in weighted average terms, meaning that movements in the Sydney and Melbourne housing markets — the largest in the country — are often influential on the broader index.
However, as shown in the table below, the declines in Sydney and Melbourne were not the largest across the country.
Those in Hobart and Darwin logged steep falls of 4.8% and 3.5% respectively, while prices also fell in Perth and Canberra. The only capitals to register an increase were Adelaide and Brisbane where they grew 0.8% and 0.3%.
Given the broad-based declines seen in the month, it saw price growth in Australia’s capitals over the past three months slow to 0.4%.
It was a similar story for the change on a year earlier where price growth decelerated to 8.3%, well below the double-digit gains reported throughout much of last year and in early 2017.
Again, that largely reflects the moderation in price growth seen in Sydney and Melbourne.
While the monthly decline in prices was steep, Lawless said that it’s not all that unusual at this time at year.
“The May home value results should be viewed in the context of demonstrated seasonality — values have fallen during May in four of the past five years,” he said.
While that may help to alleviate concerns that a damaging price correction is underway, he says that there’s still been a noticeable loss of momentum across the Australian housing market, most pronounced in Sydney and Melbourne.
“Reading through the seasonality indicates that value growth in the market has lost momentum, particularly in Sydney and Melbourne where affordability constraints are more evident and investors have comprised a larger proportion of housing demand,” he says.
Lawless says that aside from affordability constraints in Australia’s largest cities, recent measures introduced by APRA to cool investor activity in the housing market, along with out-of-cycle mortgage rate increases and weakening consumer sentiment, have also contributed to the slowdown in the market.
“Adding to the complexity in reading the current market is the recent Australian Prudential Regulation Authority (APRA) announcements at the end of March for a new round of macroprudential measures aimed at slowing the pace of interest only lending,” he says.
“Mortgage rates are continuing to trend higher, particularly for investors.
“Another factor that is likely contributing to slower growth conditions is a dent in consumer confidence. Consumer sentiment towards housing, as measured by Westpac and the Melbourne Institute, has shown a marked downturn in May.”
The question that many are now likely to be asking is what will prices do next?
Will they rebound as they have done in previous years, setting the scene for another strong period of growth led by Sydney and Melbourne, or will this mark the start of a more pronounced slump?
While history says it’s likely to be latter, the circumstances this year have changed, perhaps pointing the likelihood that this time may be different.
Along with tighter macroprudential measures towards investors and higher mortgage rates, affordability is also worse given price growth has far outstripped that seen in household incomes.
Throw in factors outside of Australia such as the decision from Chinese regulators to restrict capital outflow from the nation — potentially limiting what has been a large source of housing demand in recent years — and there’s some uncertainty as to the outlook for prices.
No one truly knows what will happen, but expect the housing market to get plenty of attention over the next few months.
Even more so than usual.
This table from CoreLogic show the performance by individual capital city, looking at movements in both house and apartment prices.