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Economics & Markets

Price dives are settling, but will property boom again?

By Dr Shane Oliver
Head of Investment Strategy and Economics and Chief Economist, AMP Capital Sydney, Australia

The Australian residential property market is continuing its recovery after unprecedented falls, but the jury is still out on whether we will see a return to boom conditions.

What the data tells us

Australian capital city house prices saw another solid rise through the month of September, with average prices rising around one per cent month-on-month, led again in Sydney and Melbourne where prices were up 1.7 per cent month-on-month in both cities.

That follows solid gains in the month of August, after the bottoming of the market we saw earlier in the year.

Mixed results

Of course, it’s not all smooth sailing, with some capital cities – Perth, Darwin and even Hobart, which has been one of the strongest performers in recent times – recording falls in September. But it does look as though we’ve passed the low point.

This follows a big pick up in auction clearance rates that we’ve seen throughout this year. Late last year auction clearance rates were down below 50 per cent, while recently they’ve been around 70-75 per cent, led by Sydney and Melbourne. This is all consistent with the property market turning up again.

Will we see boom conditions return?

The question remains: are we going to see a return to boom conditions? My feeling is that we aren’t, instead I think what we’re seeing here is a bit of a bounce.

This has been helped along by several factors, including:

  • Pent-up demand as a result of the declines over the last couple of years. 
  • The removal of uncertainty about capital gains tax and negative gearing changes.
  • Interest rate cuts.
  • Positive headlines about easing regulatory constraints, with the Australian Prudential Regulation Authority (APRA) easing its serviceability tests on lenders earlier this year.

After this initial bounce – which I think could go on a little bit longer yet – I see prices settling down to more constrained gains of around five per cent on an annual basis. This is notably lower than the 10-15 per cent that we saw during the most recent boom.

There are several reasons that lower price growth is likely. These include:

  • Credit conditions are a lot tighter now, it’s a lot tougher to get a bank loan than it was two or three years ago.
  • New units will continue to come onto the market in Sydney and Melbourne for the next six to 12 months, continuing to push the apartment markets into oversupply territory. 
  • Economic conditions are soft, with growth slowing and unemployment rising. 
  • Household debt and house price to income ratios are much higher than it was in past recovery cycles.

In conclusion…

While average house prices are certainly rebounding, it’s unlikely that we are going to see a sustained return to boom time conditions.

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Shane Oliver, Head of Investment Strategy & Economics and Chief Economist
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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.

 

This article is not intended for distribution or use in any jurisdiction where it would be contrary to applicable laws, regulations or directives and does not constitute a recommendation, offer, solicitation or invitation to invest.

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