Prop­erty prices keep go­ing down?

Lower im­mi­gra­tion, the royal com­mis­sion and tighter lend­ing are among the forces at work

Money Magazine Australia - - WHAT IF? - An­nette Samp­son

THEY’VE AL­READY FALLEN QUITE A BIT. ARE THEY RE­ALLY LIKELY TO GO FUR­THER?

First, let’s state the ob­vi­ous. Not all prop­erty mar­kets are the same and there are al­ways some that will do bet­ter than the av­er­age and some that will do worse. How­ever, it is sig­nif­i­cant that five of Aus­tralia’s eight cap­i­tal cities saw falls in Au­gust with even Ho­bart, by far the best-per­form­ing cap­i­tal city over the past 12 months, go­ing back­wards.

Since peak­ing last Septem­ber, re­search com­pany CoreLogic says hous­ing prices na­tion­ally fell 2.2% through to the end of Au­gust, with the big­gest falls in Syd­ney – down 5.6% over the 12 months.

The de­ci­sion for some of the banks to raise in­ter­est rates in­de­pen­dently of the Re­serve Bank last month is likely to put fur­ther down­ward pres­sure on a mar­ket al­ready feel­ing the ef­fects of tighter lend­ing stan­dards, re­duced for­eign in­vest­ment, low af­ford­abil­ity and a rise in the sup­ply of hous­ing in some ar­eas.

A re­cent sur­vey of 30 economists and prop­erty ex­perts by com­par­i­son site Fin­der found most ex­pected the down­turn in prices in Syd­ney and Mel­bourne to last around 20 months, with around half ex­pect­ing it to last two years or more.

Shane Oliver, chief econ­o­mist at AMP Cap­i­tal, ex­pects prices in these cen­tres to fall around 15% be­tween now and 2020. If he’s right, that means prices could have an­other 10% to fall.

He says na­tion­ally prices should de­cline around 5%, at least partly be­cause other ar­eas have not boomed to the ex­tent of the two ma­jor cap­i­tals and so will not have as far to fall.

WHAT’S DRIV­ING PRICES

The slow­ing prob­a­bly started last year when reg­u­la­tors forced lenders to re­strict lend­ing to in­vestors. At that stage in­vestors were driv­ing the mar­ket, with com­plaints that home buy­ers were miss­ing out.

Tim Law­less, CoreLogic's head of re­search, says fewer buy­ers led to more prop­er­ties on the mar­ket and re­duced com­pe­ti­tion. He says the level of ad­ver­tised prop­er­ties is al­ready 7.6% higher than it was at the same time last year, de­spite a fall in the num­ber of new prop­er­ties com­ing onto the mar­ket.

Slow­ing prices also tend to be self­per­pet­u­at­ing. When the mar­ket was boom­ing, buy­ers were driven by a fear of miss­ing out but with fall­ing ex­pec­ta­tions of price growth. Oliver says this could turn into a fear of not get­ting out, par­tic­u­larly for in­vestors who are largely re­ly­ing on price growth to jus­tify their in­vest­ment.

Lower mi­gra­tion lev­els, and the re­cent de­bate about whether mi­gra­tion should

be cut fur­ther, the royal com­mis­sion into fi­nan­cial mis­con­duct and the po­ten­tial for tougher con­trols on bank lend­ing, and un­cer­tainty about next year’s federal elec­tion are also damp­en­ing con­fi­dence in the hous­ing mar­ket. With an elec­tion due by next May, in­vestors are also con­sid­er­ing the po­ten­tial im­pact of a La­bor gov­ern­ment on hous­ing in­vest­ments. La­bor has said it will halve the cap­i­tal gains tax dis­count to 25% on new in­vest­ment pur­chases if it wins the elec­tion. It also plans to limit neg­a­tive gear­ing so that it will ap­ply only to in­vest­ments in new hous­ing, though ex­ist­ing in­vestors will be quar­an­tined from both measures. In­vestors who buy ex­ist­ing hous­ing af­ter the changes come in will be able to claim their prop­erty ex­penses against prop­erty in­come and fu­ture cap­i­tal gains but will not be able to use the losses to re­duce tax on other in­come.

While opin­ions vary on how this will af­fect the over­all mar­ket, there is lit­tle doubt the measures will have a damp­en­ing ef­fect on an al­ready slow­ing mar­ket. Ar­eas with high lev­els of in­vestor ac­tiv­ity, such as parts of the Syd­ney and Mel­bourne unit mar­kets, will feel the im­pact more than ar­eas with a higher level of owner-oc­cu­piers. Fall­ing prices are a mixed bless­ing for first home buy­ers. While they may no longer have to bat­tle cashed-up in­vestors, af­ford­abil­ity is still low and the lat­est round of in­ter­est rate rises has in­creased the costs of ser­vic­ing a loan.

Law­less says the weak­ness in the hous­ing mar­ket so far has been heav­ily con­cen­trated at the pre­mium end, with more af­ford­able prop­er­ties hold­ing their value. He says tighter credit con­di­tions are also skewed to­wards bor­row­ers with high debt-to-in­come ra­tios so many first home­buy­ers will still find it tough to get into the mar­ket.

On the plus side, most economists now ex­pect the Re­serve Bank to hold of­fi­cial in­ter­est rates for some time. If the econ­omy shows signs of slow­ing, a cut could even be a pos­si­bil­ity. Hon­ey­moon rates for new buy­ers could also im­prove af­ford­abil­ity, though they need to en­sure they can pay the higher rate at the end of the hon­ey­moon pe­riod, par­tic­u­larly if that were to co­in­cide with a broader rate rise.

An­nette Samp­son has writ­ten ex­ten­sively on per­sonal finance. She was per­sonal finance edi­tor with The Syd­ney Morn­ing Her­ald, a for­mer edi­tor of the Her­ald’s Money sec­tion and a colum­nist for The Age. She has writ­ten sev­eral books.

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