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Sydney's housing market downturn could end up being the longest on record

Chung Sung-Jun/Getty Images

Sydney home prices have fallen 7.4% over the past year, according to CoreLogic’s latest Home Value Index, the steepest annual percentage decline since February 1990.

As seen in the chart below posted on Twitter by Cameron Kusher, Research Analyst at CoreLogic, prices in Australia’s largest and most expensive housing market have now fallen 8.2% from their cyclical peak 15 months ago, making this the fastest downturn in over three decades, at least in this point in the price cycle.

CoreLogic, Twitter

Many suspect that prices in Sydney will continue to fall for some time yet, potentially making this the largest downturn in Sydney since in modern history, surpassing the downturn in the early 1990s that coincided with Australia’s last recession in 1991.

As seen in the next chart below posted by Kusher on Twitter, in the past it’s taken several years for Sydney prices to return to prior cyclical peaks whenever values have fallen this far this fast.

Following the downturn in the early 1990s, it took five years for values to return to their prior nominal peak, even without taking into account inflation over this period.

CoreLogic, Twitter

So will history repeat on this occasion?

While no one truly knows the answer, given this downturn has largely been driven by tighter lending standards, not the sharp increase in interest rates often seen before prior downturns, there are grounds to think this cycle could be even longer than in the past.

Official interest rates from the Reserve Bank of Australia (RBA) already sit at the lowest level on record, and most in markets believe the next move will be higher rather than lower.

So in the absence of an unexpected reversal of mindset from the RBA, rather than lower interest rates helping to bring forward demand as seen in the past, higher interest rates could actually reduce demand.

While the recent tightening in mortgage lending standards has now largely run its course, at least according to Australia’s banking regulator, APRA, it’s also unlikely that lending standards will be be relaxed given Australia’s already-high household debt to income ratio, removing another tailwind that helped property values in Sydney recover in the past.

There’s also an unprecedented supply of new housing being constructed in Sydney, especially apartments, adding to downside risks for prices from the supply side of the equation.

It all points to this downturn being extremely elongated compared to historic norms without a substantial pickup in household incomes, stronger population growth or additional incentives to bring forward buyer demand for Sydney housing.

None of those can be completely ruled out, but the odds at this point appear small given acute affordability constraints that still exist in many parts of Sydney, even with recent price declines.

Like Sydney, similar trends are also evident in Melbourne at present with prices having now fallen for 12 consecutive months.

Given these cities contain around 60% of Australia’s total housing wealth, should values in Melbourne also take years to move back to prior cyclical peaks, that could see the national price downturn also become the largest in modern times, especially should it spillover into smaller markets that have been holding up better this year.

You can follow Cameron on Twitter here.

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