Relax. Take a breath. It may seem like the world, or at least a substantial section of Australia’s capital city property markets, are caving in. But there’s still a ways to go before this downturn is over, according to the experts, and we really shouldn’t panic at this point.
Headlines proclaiming a sharp decline in median values for Sydney and Melbourne housing markets respectively, could understandably have some investors on edge. If say, you were a little sloppy with your finance structures when acquiring new assets over the last few years, you might be somewhat concerned about being too highly geared.
But as investors who’ve been around the proverbial block a few times understand, there are always cyclical ups and downs. It’s more a case of how you respond to them (and how you invest in the first instance!) that determines your success or failure as an investor. Those who are in it for the long haul in particular, will prevail during both good and bad times.
As we explore what’s ahead for our markets in 2019, according to various industry analysts, remember this is simply another evolution in the Australian property cycle. Another turn of the hand if you will.
And keep in mind too, the data is representative of broad brush medians. Some areas will hold their value, or have slightly lesser declines. Others will drop further than the averages.
The bottom line is, these more trying times are very good at reminding us to be discerning, when we make that next purchase for our property portfolio.
So what’s ahead for property in 2019?
Well, as it currently stands, more of the same seemingly. In December last year, Australian capital city home prices dropped by 1.3%, according to CoreLogic’s Home Value Index; representing the largest monthly decline since 1983.
Of course Sydney and Melbourne are leading the charge in falling property prices, recording losses for December of 1.8% and 1.5% respectively, and 1% and 1.3% over the first 3 weeks of January.
Median prices also eased slightly throughout December in Brisbane, Adelaide and Perth, with downward adjustments ranging from 0.3% to 0.8%.
Overall, the past 12 months have seen capital city house prices drop by 7.1% in average weighted terms, with Sydney recording a 12 month decline of around 11% and Melbourne of 7%.
What’s keeping a lid on things?
According to CoreLogic, there were around 25,000 and 32,000 homes on the market in Sydney and Melbourne toward the end of January. This represents an increase on levels from a year ago of 23.7% and 43.1% respectively.
Interestingly, this saturation of stock has come at the same time as a steep decline in new property listings, for both cities over the same period.
This is reflective of weaker market demand right now, driven by tighter home lending standards, alongside factors such as a drop in overseas investor activity and a general lacklustre outlook for values.
As is usual at this point in the property cycle, the effect of falling home prices has started to trickle down into other sectors. The apartment market in particular, recorded a steep fall in building approvals and activity levels last August of 9.4% for 12 months.
Concerns for the construction sector are growing as new dwelling approvals fell again by 4.1% last December, making it the lowest number since June 2013, according to the Australian Bureau of Statistics.
Then there’s consumer sentiment, which always takes a bit of a battering when people see headlines like “Housing Market Downturn”. The retail sector has felt the pinch of tighter property markets, with a sharp weakening in household consumption over the last half of 2018.
Where to now?
As mentioned earlier, the key at any stage when cycles are in this state of flux and re-adjustment, after a particularly bullish phase of growth, is to remain level headed and recognise, “this too shall pass”.
In the meantime, financial markets are predicting a greater than 60% chance of a further 25 basis point rate cut from the Reserve Bank, before the end of this year.
Basically, things are likely to look a little worse for a little longer, before they start to look somewhat better again. How bad it might get and how long it might last…no one can really say for sure. We’ve never really experienced the current global market conditions and transitions we’re facing.
But AMP Capital believes recent declines in Sydney and Melbourne could double and quadruple respectively, potentially placing upward pressure on unemployment and downward pressure on wages and inflation. Not an ideal scenario.
AMP also claims the RBA will have to cut the cash rate twice again this year, reducing it to a record low 1%. And it could be that the government will be forced to take a much harder look at housing policy at federal budget time.
AMP Capital’s Chief Economist Shane Oliver has stated that this could be the tip of the iceberg, with a lot more downside to come. Possibly to the tune of 25% for Sydney and Melbourne housing out to 2020.
He adds however, “A 25% plunge in Sydney and Melbourne may seem like a crash, but given the extent of the prior gains it’s arguably not. A 25% top to bottom drop would take prices back to where they were in late 2014/early 2015.”