Australia’s housing market continues to deteriorate. Since the peak in September 2017, house prices have now fallen for 17 consecutive months.
Sydney and Melbourne are suffering the biggest falls largely because they had the largest run-up in house prices over the past few years.
The health of the housing market has significant implications for Australia’s economic growth and, in turn, a major impact on the share market.
So what can investors expect in coming years?
Firstly the bad news is that we see prices continuing to fall for the next few years because of several factors in the Australian market:
- Tighter credit across banks. (This started before the Royal Commission, which could also lead to further credit tightening).
- A huge surge in the supply of new homes, particularly apartments.
- Tighter conditions for foreign buyers which is reducing demand. (Australian authorities have made it harder for foreigners to buy and Chinese real estate investment into Australia has slumped 70 per cent since 2015).
- During the housing boom, we had ‘fear of missing out’ (FOMO). With falling prices that has changed to ‘fear of not getting out’ (FONGO). That fear links back to investor sentiment in the housing market.
- Uncertainty around a possible Labor win in the Federal election. Labor is proposing to tighten negative gearing and limit it to new properties from a yet-to-be-given date after the election. They also want to reduce or cut in half the capital gains discount for all assets sold after that date.
As a result, we see house prices in Sydney and Melbourne falling another 10-13 per cent in 2019, and possibly more in Melbourne which lagged a bit going into this down turn. That would take top-to-bottom falls to around 25 per cent in these two cities.
While other parts of Australia will hold up a bit better, national average prices will see top-to-bottom falls of around 10 per cent. We see a bit more weakness in Perth and Darwin as those markets are particularly sensitive to what’s happening in the mining sector.
Finding a bottom
But the good news is that we expect house prices to bottom probably in mid-2020.
A few factors will help provide a floor.
Firstly, we expect the Reserve Bank of Australia to cut the cash rate at least twice in the second half of this year, which will provide some upside for housing prices. We’re looking at a cash rate of around one per cent by the end of 2019.
Secondly, population growth remains very strong at around 1.5 per cent per annum, which will also boost demand for houses and help stabilise prices.
Thirdly, housing will become more affordable and once again attract buyers.
Removing a drag
The weak housing market is a negative for the Australian economy and will impact housing construction and consumer spending. Investors should brace for more falls in these key indicators this year.
But as we move through 2020, rate cuts, improved affordability and strong population growth will stabilise the housing market and remove a significant drag on economic growth, which will be positive for the share market.
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