AMP says continued falls in Sydney and Melbourne home prices could force the RBA to cut rates again

  • Sydney and Melbourne home prices have fallen 5.4% and 0.5% respectively over the past year.
  • AMP Capitals says they’re still likely to fall by another 10-12% over the next couple of years.
  • Similar price declines in the past have seen the RBA cut interest rates.

Home prices in Sydney and Melbourne continued to fall in July, leaving the decline in median prices in both cities down 5.4% and 0.5% respectively over the past year.

Shane Oliver, Chief Economist at AMP Capital, says the price downturn is only getting started.

“Tighter bank lending standards — particularly around borrowers income and expenses and restricting loans to households with high debt to income ratios — along with poor affordability, rising supply, falling price growth expectations and FOMO (fear of missing out) going into reverse are pushing prices down in cities which have seen strong gains since 2012,” he says.

“The decline in Sydney and Melbourne property prices likely has further to go as these considerations continue to impact.

“We expect these cities to see a top to bottom fall in prices of around 15% spread out to 2020 which given falls already recorded since last year implies another 10 to 12% downside.

“So we are only part way there yet!”

AMP Capital

Oliver says recent declines in auction clearance rates — suggesting a widening mismatch in buyer and vendor price expectations — are consistent with this view.

“The recent average mid-40% auction clearance rate in Sydney, and the low 50% auction clearance rate in Melbourne, are consistent with ongoing price weakness,” he says.

Given Sydney and Melbourne account for around 40% of Australia’s total housing stock, and accounts for around 60% of the nation’s total housing wealth, Oliver says continued price weakness increases the risk of a spillover into household spending, and with it broader economic growth, meaning the next move in official interest rates from the RBA may not be higher but lower.

“Ongoing home price falls in Sydney and Melbourne will depress consumer spending as the wealth effect is now going in reverse and so homeowners will be less inclined to allow their savings rate to decline,” he says.

“It’s consistent with our view that the RBA will leave rates on hold out to 2020 at least. Home price weakness is at levels where the RBA started cutting rates in 2008 and 2011, so we still can’t rule out the next move in rates being a cut rather than a hike.”

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”.

Given the expectation that stronger economic growth will help reduce unemployment and help boost wage and inflationary pressures in the period ahead, it said members agreed that “the next move in the cash rate would more likely be an increase than a decrease”.

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