Sydney and Melbourne property price falls could have a long way to go before bottoming out, with a “fear-of-missing” out mentality in the market becoming a “fear-of-not-getting-out” anxiety.
Tighter lending standards, poor affordability, rising supply and falling capital gains expectations could create the conditions for a top-to-bottom fall of 15 per cent in both Sydney and Melbourne’s housing markets, AMP Capital chief economist Shane Oliver predicts, with falls continuing until 2020.
Many investors may look to sell to avoid bearing the brunt of a several-year property price downturn, the economist warns.
Once leading the Australian house price boom, Sydney and Melbourne have reversed course, Domain Group and CoreLogic data show, with house prices in Sydney down between 4.5 per cent and 5.4 per cent from the peak, depending on how the median prices are calculated.
Melbourne houses, meanwhile, are between 2.7 per cent and 3 per cent below the peak.
FOMO (fear of missing out) risks becoming FONGO (fear of not getting out) for some investors.AMP Capital chief economist Shane Oliver
With those falls in mind, Dr Oliver points to another 10-12 per cent downside for property in the two cities.
“We are not there yet, but FOMO (fear of missing out) risks becoming FONGO (fear of not getting out) for some investors,” Dr Oliver wrote.
The property correction will be largely confined to Sydney and Melbourne, according to the economist, with other cities are said to be in much better shape.
“Most are likely to see moderate growth such that the top-to-bottom fall in national average home prices will be more like 5 per cent.”
(Source: Morgan Stanley Research)
The Reserve Bank, which will meet for its August interest rate decision on Tuesday, has not moved the official cash rate in two years.
Governor Philip Lowe has, on several occasions, noted the board’s desire to hike rates when eventually appropriate, but Dr Oliver sees that becoming increasingly unlikely.
“With falling home prices set to drive a negative wealth effect it’s hard to see the RBA raising rates anytime soon and, if anything, there is a significant chance that the next move will be a rate cut,” Dr Oliver wrote.
Morgan Stanley analysts also released a bearish outlook on the state of the property market following yet another downbeat set of monthly data.
“Our housing model suggests that both prices and approvals are likely to fall further, and given the subdued outlook for credit demand and supply, the still-elevated level of prices and indebted households, it looks unlikely that the market will trough in the immediate future,” Morgan Stanley strategists led by Daniel Blake wrote.
(Source: Morgan Stanley Research)
“We remain alert to any impact from a sharper tightening in credit or exogenous weakening in the broader economy that could accelerate declines and spark a negative feedback loop between the housing market and indebted consumer.”
Holding on: RBA to chalk up two years at 1.5%
The Reserve Bank is expected to leave interest rates on hold well into the future, with records for the longest period of inaction now being broken every month.
While AMP Capital’s Shane Oliver sees a possible rate cut on the horizon, other economists still expect a hike to follow a prolonged wait.
“We believe that rates won’t be raised to 1.75 per cent until November next year,” Capital Economic chief Australia and New Zealand economist Paul Dales said last week. “And there is a rising chance that rates don’t rise until 2020.”
Mr Dales said the message from the Reserve Bank this week will be that “rate won’t rise for some time”.
“The recent acceleration in the rate at which house prices are falling must be worrying the bank given that the full tightening in credit conditions has not happened yet.”