Communication

Why a property crash is unlikely

By AMP Capital

National property prices dropped 0.4 per cent for the year ended to 31 May 2018, according to data from property analytics group Core Logic, marking the first time there has been an fall over any twelve month period since October 2012. However, this slide in house prices in Sydney and Melbourne will not result in a genuine property crash.

The fall was driven by a drop in prices in Sydney.

There is no doubt the Sydney and Melbourne property markets did get a bit bubbly and therefore we are going to go through a pretty weak patch in those two cities, but we don’t see a property crash.

A property crash should be defined as a situation where prices come off 20-25 per cent on average, not just in one suburb or one house but across the market.

I do not see that happening for several reasons.

The first is that for that to occur, you would expect to see Australians forced out of their homes en masse; and for that to happen you would have to see much higher interest rates or much higher unemployment, and I just don’t think we are going to see that.

The Reserve Bank of Australia is not likely to raise rates until at least 2020 and the next move being a cut cannot be ruled out.

What we will see though is ongoing weakness in the Sydney and Melbourne property markets over the course of the next couple of years.

I think prices are going to come down on average by 15 per cent from top to bottom of which they have already fallen 4 per cent or so. Some areas a little bit more, some areas a little bit less, particularly as tighter bank lending standards continue to impact.

The Australian Prudential Regulatory Authority has asked banks to strengthen lending standards around borrower’s income and expenses and limit loans to high debt to income borrowers. That combined with the likely transfer of interest-only loans to principal and interest loans going forward could pressure the property market further.

Looking across the rest of Australia though, the outlook is a mixed bag.

Prices in Darwin and Perth look like they are starting to bottom out after going through several years of price weakness. Elsewhere you are looking at moderate gains.

Places like Canberra, Brisbane, and Adelaide didn’t experience anything like the boom that Sydney and Melbourne had, and therefore they are not going to have the same downside. Likewise, Hobart is still doing really well.

I don’t see a property crash unless we get much higher interest rates or much higher unemployment.

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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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