Big city prices to fall further

Home prices have continued to fall, with capital city dwelling prices dropping for the 10th month in a row in August. “Tighter bank lending standards, poor affordability, rising unit supply, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors are pushing prices down in cities that have seen strong gains since 2012, ie Sydney (which saw prices rise 72% over the five years to its August 2017 high) and Melbourne (57% over the five years to its November 2017 high),” says Shane Oliver, head of investment strategy and chief economist at AMP Capital.

Oliver expects the decline in Sydney and Melbourne to continue but predicts other capital cities are likely to perform better as they have not come off the same boom. Home prices in regional centres are likely to hold up better.

“Overall, Sydney and Melbourne are likely to see a top-tobottom fall of around 15% spread out to 2020 but for national average prices the fall is likely to be around 5%,” says Oliver.

“A crash-landing remains unlikely in the absence of much higher interest rates or unemployment but it’s a risk given the difficulty in gauging how severe the tightening in bank lending standards will get and how investors will respond as their capital growth expectations collapse at a time when net rental yields are around 1%-2%.” Also see page 68.