ANZ says Sydney and Melbourne home prices will fall 10% from their highs

Cameron Spencer/Getty Images for Red Bull Air RaceANZ expects a modest and elongated price downturn ahead.
  • ANZ Bank forecasts that after falling 4% in 2018, Australian home prices will fall by an additional 2% in 2019.
  • It expects Sydney and Melbourne to lead the national decline with values tipped to fall 10% peak to trough.
  • After primarily being driven lower by tighter lending standards this year, ANZ says home prices will face a new headwind in 2019: official interest rate hikes from the RBA.

Australian home prices are likely to fall over the next couple of years, reflecting the impact of tighter lending standards and the prospect of higher official interest rates from the Reserve Bank of Australia (RBA) placing downside pressure on prices, says ANZ Bank’s Australian economics team.

However, unlike some more pessimistic forecasters, the bank says the downturn is likely to be modest and elongated in nature, rather than an outright price crash.

“We still expect nationwide housing prices to decline by 4% in 2018, and a further 2% in 2019,” says Daniel Gradwell and Joanne Masters, Economists at ANZ.

“Sydney and Melbourne are still the primary drivers of the current fall in prices.”

And they expect the Sydney and Melbourne-led national downturn will persist in the coming year.

“We anticipate price declines of around 10% peak to trough in these two cities,” they say.

“We expect Sydney to perform slightly worse than Melbourne, given the large additions to supply set to arrive in the northern city, at a time of somewhat softer population growth.”

According to data released by CoreLogic earlier this week, Sydney home prices have already fallen 6.1% over the past 12 months, and by a smaller 2.9% in Melbourne — the latter reflecting that Melbourne’s downturn started later than Sydney’s.

However, mirroring recent trends, ANZ expects home prices in the smaller capitals and in regional areas to fare significantly better, helped in part by reduced affordability constraints in these locations.

“We are more optimistic on the Brisbane, Canberra and Adelaide markets,” Gradwell and Masters say.

“The former is benefitting from accelerating population growth, while the latter two are not expected to be highly sensitive to tighter credit conditions, given their relatively strong housing affordability.”

For Perth and Darwin — Australia’s mining capitals — they say values are “expected to slide further as the last of the post-mining boom adjustment wraps up” while in Hobart, the top performing capital over the past year in terms of capital growth, they expect the price boom will come to an end as “fundamentals around the economy soften”.

This chart from ANZ shows its forecasts for prices by state and territory capital.

ANZ Bank

After falling this year primarily on the back of tighter lending standards, especially towards high loan-to-income, debt-to-income and interest-only borrowers, ANZ expects a new headwind will emerge for home prices in 2019: official interest rate increases from the RBA in the second half of the year, acting in tandem with recent out-of-cycle mortgage rate increases delivered by many major lenders to lift borrowing costs.

“2019 will be impacted by the cost of credit,” Gradwell and Masters say.

“Higher interest rates at the end of 2019 are also expected to result in further price weakness early in 2020, before the market stabilises over the rest of the year.”

ANZ continues to see the RBA lifting official interest rates twice in the second half of 2019, leaving the cash rate sitting at 2% from 1.5% at present.

As for risks ANZ’s price forecasts, they’ll be keeping a close eye on auction clearance rates in Sydney and Melbourne for guidance.

“Recently, auction results have slipped slightly further in Sydney and Melbourne,” they say.

“While this, and price developments, are largely in line with our forecasts, further weakness would present some downside risk to our outlook.”

ANZ’s price forecasts are similar to those offered by the Commonwealth Bank — Australia’s largest mortgage lender — who predicted earlier this month that Australian capital city home prices would fall 5.9% from their cyclical peak by the end of 2019.

Like ANZ, it forecast that Sydney’s market would lead the national decline with a fall in values of 10.1% from peak to trough.

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