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How Far will the Property Correction Go?

Property prices in Australia have fallen over the last few months, especially in the heated Sydney and Melbourne markets. According to data from Domain Group, prices are now 2 percent lower than their December 2017 peak, with many experts expecting further drops to come. The property boom that defined the last few years is facing its toughest pressure to date, with national prices recording their first negative year since 2012. While no-one knows just how far the correction will go, most analysts are expecting median prices to drop further before we see a significant bounce.

According to second-quarter data from Domain, capital city house prices have dropped 1 percent over the last three months and 1 percent over the last year. Since reaching their peak in December 2017, house prices have dropped 2 percent and apartment prices are down 2.2 percent. As you might expect, the most heated markets are experiencing the biggest corrections, with prices in Sydney dropping 4.5 percent over the year to reach a median of $1.14 million. Melbourne prices have fallen further than Sydney prices over the last quarter, at 2 percent and 1.4 percent respectively. The new median house price in Melbourne is just over $880,000.

While the sliding numbers recorded in Sydney and Melbourne might not seem huge, recent historical data puts them into perspective. House values in some areas of Sydney have falling more than 10 percent over the year, with the city recording its largest annual drop in house prices since the global financial crisis. Melbourne recorded annual house price growth of 16.5 percent this time last year, a number which was reduced to just 0.5 percent in the latest figures. According to Domain Group chief data scientist Nicola Powell, “The annual rates of growth are the slowest since 2012... It really is going sideways now.”

The correction is also starting to affect other national markets, although conditions are mixed from state to state. The median house price in Brisbane is down 1.2 percent over the quarter to $566,000, with Canberra also down 1.2 percent to $750,000, and Adelaide down 1.9 percent to $535,000. All of the other capitals recorded positive growth over the last three months, with Darwin up 2.7 percent to $540,000, Perth up 3.4 percent to 556,000, and Hobart up 6.1 percent to $461,000. Along with a technical correction based on unsustainable price growth, the market is also being affected by tighter lending conditions imposed by the Australian Prudential Regulation Authority and fallout from the Banking Royal Commission.

With the housing market correction now getting very hard to ignore, analysts are starting to forecast just how big and long-lasting it will be. The most bearish forecast is from Capital Economics, who are predicting a 12 percent peak-to-trough fall in property prices nationwide by the end of 2021. NAB have a much more positive outlook with a national peak-to-trough fall of 3-4 percent, although they think Sydney prices will drop by 6 percent and Melbourne prices will drop by 4 percent. AMP Capital are predicting a two-speed market correction, with prices in the two biggest capitals said to drop a massive 15 percent in contrast to a nationwide drop of just 5 percent.

While forecasts differ widely, even the most pessimistic of these predictions is based on a housing market correction rather than a crash. According to NAB’s Alan Oster, “People say ‘well it could fall 10 per cent’… Well, yes but it’s still 30 per cent above where it was two years ago.” CBA senior economist Gareth Aird has similar sentiments, saying “A fall in prices in Sydney of 10 per cent from peak to trough would take them back to their September 2016 level. And a fall of around 7.5 per cent in Melbourne from peak to trough would take prices back to their December 2016 level.”


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