The CBA thinks Sydney property values can fall 10%

(Harry How / Getty Images)
  • CBA says Sydney house prices will decline steadily until the end of 2019, with fall of 10.1% from peak to trough.
  • New modelling by economist Gareth Aird predicts house prices based on four key variables.
  • Aird doesn’t expect a hard landing for house prices, largely because the broader economy continues to perform well.

  • Australia’s property market won’t crash, according to the Commonwealth Bank.

    But as the housing downturn remains ongoing, it makes sense that more analysts are turning their attention to the medium-term outlook.

    CBA economist Gareth Aird forecasts that house prices in Sydney and Melbourne will continue declining until the end of next year.

    “We see the peak to trough being around 10% in Sydney and a little less in Melbourne (8.8%),” Aird said.

    This table summarises CBA’s forecasts for changes in house prices across Australia’s eight capital cities to December 2019:

    Commonwealth Bank

    Aird’s model is calculated as a function of four key variables:

      1. Annual changes in mortgage rates (1 year advanced);

      2. The annual change in the flow of credit (six months advanced);

      3. Auction clearance rates (four months advanced); and

      4. The house price expectations index from the Westpac/Melbourne Insitute consumer sentiment survey (2 months advanced).

    He concedes that “predicting property prices can look foolish retrospectively”.

    However, the chart below shows that the four leading indicators outlined above track actual movements in house prices “very well”.

    Commonwealth Bank

    “Clearly, we can’t forecast auction clearance rates or the household perception around the future path of dwelling prices.”

    However, using the latest data for those two variables helped to predict near-term movements in house prices.

    And the first two variables — mortgage rates and credit growth — historically have a lagged impact of 6-12 months months, which Aird said makes them useful indicators over that time frame.

    Based on those inputs, it’s not hard to see why the market is currently in a downturn.

    Three of the big four banks have just raised mortgage rates, and Aird said rates “are more likely to go up rather than down” over the next year.

    Credit growth to housing investors has fallen to an all-time low. Auction clearance rates have steadied at a lower base, but overall listings remain elevated — especially in Sydney and Melbourne.

    And in Westpac’s latest consumer survey, the number of respondents who said they expect house prices to rise over the next year fell to the lowest level since the question was first asked in 2009.

    CBA’s base case is that Sydney home prices will decline by 5% annually in 2018 — a relatively mild assessment given the latest weekly data from CoreLogic Sydney house prices are currently 5.9% lower than this time last year.

    That would take overall declines from Sydney’s July 2017 peak to around 7.5%.

    “For Melbourne, prices would be down by around 5% from their November 2017 peak,” Aird said.

    “Nationally, we think prices will end the year down by around 3% with a roughly similar outcome likely in 2019. That would mean the total correction in dwelling prices is not too dissimilar to the corrections of 2010 and 1989,” he said.

    In other words, CBA doesn’t expect a hard landing — largely because the broader economy outside of housing is still performing well.

    Aird noted the continued strength in Australia’s labour market, and said he expects the unemployment rate will decline further which lowers the risk of mortgage defaults.

    Then there’s Australian rate of population growth, which is rising a lot faster than other developed economies, driven largely by a strong migrant intake.

    While that raises concerns around productivity levels per capita, it also “props up the underlying demand for housing,” Aird said.

    And he doesn’t expect the status quo to change any time soon.

    “There is bipartisan support from both major political parties to run a big immigration intake each year,” he said.

    “In summary, we expect the orderly deflation in dwelling prices to continue against an economy that is performing relatively well from an output and employment growth perspective.”

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