Property prices keep going down?

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

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.