The shift of mortgagees to “principle and interest” from interest only loans is one of the things to watch when considering the potential for a price correction in some of the more highly-valued residential property markets, Dr Shane Oliver, AMP Capital's Head of Investment Strategy and Chief Economist, says.

“When they [mortgagees] do that, they face a big increase in their debt servicing costs,” Oliver says, also noting that a possible Reserve Bank of Australia interest rate hike might not be an issue to consider for some time.

Regulators have been pushing banks to reduce their exposure to interest only loans this year as part of macro prudential measures to address high valuations of properties in Sydney and to a lesser extent Melbourne.

“Clearly, the Sydney market is at the top with clearance rates up well over 50 per cent. In the past when you’ve seen that prices have come down,” Oliver says.  

The housing market in Australia, though, is a tale of many different stories, with Sydney and Melbourne diverging from characteristics in other capital cities and in other states, Oliver points out.

Corrections will come in Sydney and Melbourne, although Melbourne population growth is still somewhat supportive of valuations there, Oliver notes.

Oliver predicts a between 5-10 per cent decline in these markets over the next 12 months to two years.

“To get a deeper decline [than between 5-10 per cent in residential property valuations in Sydney and Melbourne] decline you’d need much higher interest rates, which seems unlikely and big rise in unemployment, which again seems unlikely,” he says.

Important note: 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) 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.