Economics & Markets

House prices still falling but there could be light at the end of the tunnel

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney, Australia

The latest Australian house price data shows prices continue to fall across the nation, particularly in Sydney and Melbourne.

But the pace of the decline is starting to slow a little and falls have become more broad-based, rather than being focused in the two big cities.

In April, house values fell across every capital city apart from Canberra, while regional areas of Tasmania, Victoria and South Australia also avoided a fall.

Perth and Darwin are looking particularly weak, even though house prices in those markets have been falling for a number of years.

More falls forecast as negative sentiment bites

We expect to see further falls in home prices this year, especially as more apartment developments are completed. There is also a number of other negative factors putting downward pressure on property prices including tighter credit conditions, the introduction of comprehensive credit reporting and a fall in demand for properties from foreign buyers which are all also dampening conditions in the market.

A contributing factor is the negative sentiment in the property market, which has been in decline since late 2017. AMP Capital is forecasting a further fall in property prices of five per cent around the country, still centred in Sydney and Melbourne.

Impact of interest rate moves

Interest rates are also a contributing factor to house prices. While the Reserve Bank of Australia (RBA) declined to cut the cash rate in May, we are forecasting it will cut interest rates in June by 0.25 per cent, with another cut later in the year, with the official cash rate to fall to one per cent by the end of the year.

The RBA may have decided not to cut the cash rate in May to avoid becoming embroiled in the Federal election campaign and to give it further opportunity to assess conditions in the labour market over the next month.

Despite increasing economic pressure, the RBA has been reluctant to cut the cash rate, but lower inflation and a weaker growth outlook mean a rate cut is likely, in part to offset the negative wealth effect from the falling property market and depressed consumer spending.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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