House prices in Sydney and Melbourne look set to fall 'around 5% or so this year'

Save your deposit dollars. Peter Parks/AFP/Getty Images

A Sydney-led national house price slowdown appears to be under way in Australia.

Prices in Australia’s largest and most expensive housing market fell 0.9% in December, leaving the decline over the past three months at 2.1%.

From the recent cyclical peak struck in August, prices in Sydney have now fallen by 2.2%, driven lower by weakness in houses rather than units.

As a result of the recent declines, annual price growth has now slowed to 3.1%, well below the 17.1% pace seen just seven months ago.

And, as seen in the chart below from AMP Capital, there’s now a very real possibility that annual price growth in Sydney may turn negative in the months ahead.

Source: AMP Capital

“Weak auction clearance rates point to more price falls ahead as the impact of APRA’s tightening in lending standards, deflated expectations for price gains and rising supply continue to impact,” says Shane Oliver, head of investment strategy and chief economist at AMP Capital.

And with prices in Melbourne also starting to fall, coinciding with declining auction clearance rates like those seen in Sydney, Oliver says the weakness in December will likely extend in the year ahead.

“The Melbourne property market appears to be following Sydney down although stronger population growth is providing some support,” he says.

“Prices in Sydney and Melbourne are expected to fall by around 5% or so this year.”

While that would be in stark contrast to the performance seen in recent years, Oliver says low interest rates and support for first home buyers will provide “some support and should help ensure only moderate price falls”.

“A property crash is unlikely in the absence of much higher interest rates or unemployment — both of which are unlikely,” he says.

Outside of Australia’s largest cities, Oliver says that prices in Perth and Darwin are likely close to bottoming while those in Hobart are “likely to remain strong”.

For Brisbane, Adelaide and Canberra, Oliver is forecasting moderate price gains this year.

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