Australia’s house price correction has only just begun

By Martin North, Principal Analyst at Digital Finance Analytics:

Today we look at the current home price dynamics, as we are still seeing the property sprukiers saying that, first now that prices have fallen, it’s a great buying time and second, that prices will stay high because of the lack of supply. Neither of these statements are true.

The Domain quarterly house price data to June 2018, suggests that in Sydney the average house price is $1,144,217 and has dropped 1.46% in the past quarter. But the averages tell us nothing, as many suburbs are down more than 10% in the past year.

For example, in Petersham, the median house price is $1,367,500, and has fallen by 15.2% since June 2017. In Chatswood the average house is down 11.1%. But the real damage is being done in the apartment market, with Milsons Point units at an average price of $1,480,000 and down 22.9%, followed by Lewisham at $697,500 down 22.4% and Ultimio at $730,000 down 13.1%.

All these suburbs have been subject to significant numbers of new high-rise property investors, and now many will be well under water.

There was a very timely article in The Conversation yesterday from Rachel Ong, Professor of Economics, School of Economics and Finance, Curtin University. She makes the point that rents have hardly risen at all over the past decade, signalling no lack in property supply.

Overall, rent increases are clearly not keeping pace with soaring property prices in all major capital cities in Australia. So claims that a housing shortage is the principal cause of a lack of affordable housing are unfounded. Supply-side solutions, while important, will need to be targeted directly at low-income groups who find it difficult to compete in private rental markets to meet housing needs.

On the other hand, successive governments have offered preferential tax treatments of housing assets. These have encouraged a significant build-up of wealth in housing assets. Some of these favourable tax advantages have undoubtedly been capitalised into rising property prices. That has made it harder and harder for renters to break into the home ownership market. These are structural problems embedded within our tax policy settings. Hence, their impacts on house prices will not magically disappear any time soon unless policymakers are willing to undertake meaningful tax reform that shifts the emphasis away from treating housing as a commodity back to affordable housing as a fundamental right of all Australians.

And I would add to the mix, too easy credit, also helped to drive prices higher, as we have discussed before. Plus, the average number of families per dwelling has not moved for years, suggesting that supply it simply not the problem.

Ong is correct, the policy settings are wrong. Moreover, if Labor did crimp negative gearing, as they have said they would, this will put further downward pressure on prices in the investment sector.

But this leads to two important observations.

First, that there is no supply limited floor to home prices. They will fall further in the months ahead, as credit continues to be tight with more new stock coming on stream. And this is despite the current migration rates.

Second, as more investors in particular see their capital values sliding, they will have to decide whether to cut their losses and sell into a falling market (which will drive prices lower) or hold and lose more value.

All this points to prices lower for longer, which really highlights how out of key the property spruikers really are.

Remember the old warning, prices can fall as well as rise, and we are seeing this in spades at the moment. I continue to think 2019 will be the crunch year.

Comments

  1. i aint buyin it! at most we’re gonna have house prices circa around 2013-2015 for a while before the inevitable slow creep again upwards. they were unaffordable then, they’ll still be unaffordable now. late 90s/early 2000s prices or bust.

    • ErmingtonPlumbingMEMBER

      Im predicting 2010 -2011 prices,…that’ll bring Ermo prices back to the 600s,…that’ll make em to “Fair value” IMO.

      • If the trade war hots up, steel imports / iron price collapse, and credit ratings is slashed – prices will fall by 50% absolute minimum.

        No way around this – Australia is going to be viewed by the world between hands covering eyes, fingers slightly spread – before they turn away, no longer able to watch.

        We are going to fall – like absolutely EVERY BUBBLE by as much as we rose, and then some. Take a look at any graph – 50% is being incredibly generous.

        The SECOND, and absolute MICRO SECOND any economic, regulatory or banking repercussion hits Australias economy for its poor household debt position, there will be an absolutely catastrophic cascading failure through the system.

        Its going to be absolutely EPIC.

        .

      • Super Phoenix

        Rental yield (imputed rent for owner occupiers) is an established and reliable measure of the value of residential properties. Because of the ongoing holding costs, the fair value of a residential property is 15 times the annual rent minus the stamp duty.

      • “If the trade war hots up, steel imports / iron price collapse, and credit ratings is slashed – prices will fall by 50% absolute minimum.

        No way around this – Australia is going to be viewed by the world between hands covering eyes, fingers slightly spread – before they turn away, no longer able to watch.

        We are going to fall – like absolutely EVERY BUBBLE by as much as we rose, and then some. Take a look at any graph – 50% is being incredibly generous.

        The SECOND, and absolute MICRO SECOND any economic, regulatory or banking repercussion hits Australias economy for its poor household debt position, there will be an absolutely catastrophic cascading failure through the system.

        Its going to be absolutely EPIC.”

        Ahahahaha you must be new to this…..

        Good luck waiting for a 50% nominal drop. I suspect you will be waiting a very long time

      • Banks have just cut credit to first home owners by 40%, and will require them to have 20% deposit or bank of mom and dad support to even be considered. The base of they pyramid has collapsed and the Ponzi scheme bonfire is lit. Rates are going up, Car industry redundancy pay checks are about to run out, Intrest rates are going up, Chinese wont settle falling value appartments, and then the construction industry is toast as well. The perfect storm is about to hit, and we know how that movie ended!

      • CBA dropped 10bps off a few home loans yesterday, and others will probably follow. I think we’re dreaming to think prices will drop to an affordable level in the major capitals. Immigration is full steam and not likely to stop as they seek more PIV/SIV migrants. I’ll be happy to say I’m wrong.

        In the event of a global major market correction and a real risk analysis of the global debt which per capita we’re are right up there then I think we will see some real downward slide in RE….maybe in 2019??

      • Haha. So factor in the interest (remember that people?), you think that paying over a million bucks for a place in Ermo for God’s sake is fair value?

        We have different concepts of value.

  2. In truth Australian property prices are determined by a massive perpetual motion reactor that is housed at a CSIRO facility at Lucas Heights that fuses Spruikonium 235 with Bullshitium 239 – each element generated at a secret facility beneath the DomainFax buildings in Melbourne and Sydney. The reaction is triggered by a lightning bolt that hits the flag pole of the parliament building in Canberra directing it to the temples of Mathias Corman via electrodes held by Dr Morristein. Mathias then rises from the slab saying “Fvriends…Ve need more fviends…” and throws the knife switch that drives the Australian economy’s conveyer belt that brings in 250,000 people per year to live in the dog-box slums of the 21st century being built in our capital cites by an old Russian troll who lives in a gold tower and counts his money.

    The Brothers Grimm wrote about a similar tale where Rumpelstiltskin once turned straw into gold because a millers daughter got locked in a high rise apartment by the King’s housing policy. Our neoliberal politicians have just updated and modernised the process over the last 15 years. Rather than the first born child the Russian overlord just wants the soul of our nation and our quality of life (which Dr Morrestein and King Malcolm were thinking of flogging to China anyway; so no great loss).

    It all makes perfect economic sense and produces Jobs-n-Growth. It is a credit to the brilliant minds who thought the scheme up (Brothers Grimm). So, don’t listen to Martin North. He sounds like someone who did not buy at the right time – a renter or someone without massive debt. House prices always go up and Australian banks turn straw into gold. Newton discovered this as the 4th Law of Thermodynamics.

  3. Well done on the Monty Python avatar for the article. I feel like i’m living in Monty Python world. 🙁

  4. Obviously there’s more room to fall in Sydney and Melbourne than in Brisbane or Perth. Also, there’s a major difference between dog box units and quality family homes. So I think it could be foolish to sit on the sidelines if you can afford to buy a quality family house in Adelaide (for example), just because you know that the investor unit market in Geelong is about to tank – especially if you’re planning to live there 5 years plus…

    • So we should buy a house for $400-$800k knowing it will be worth $200-$300k in five years time – because its quality.

      Here’s a red hot tip – there have been no quality homes built in Australia in the last two decades – and by no I mean NONE, ZERO, ZIp, NADA, ZILCH, LING.SIFR

      • The house doesn’t matter. You pay for the land.

        Good luck with waiting for the $200k-$300k house.

        You have the fervour and zeal of a new convert. In time you will learn to chill.

      • Thanks Peachy. Been here far longer than you my young Padawan. I have no feverishness – am merely stating stone cold facts. You sound like Andrew Fraser.

      • If you’ve been here a while, you might want to get yourself checked out. You come across as having become rather unhinged.

      • Correct. New Australian houses are environmental nightmares that use electricity to inefficiently pump out heat energy from the sun in summer and generate heat to be lost to the environment in winter. Concrete dog boxes are only liveable if vast amounts of electricity are generated and consumed to prevent them becoming ovens to cook high density battery hens in summer. They are a sink for fossil fuels tied to the old carbon economy.

        “The house doesn’t matter. You pay for the land.”

        And what determines that land price? Anything to do with demand generated via mass immigration and consumption of grossly inefficient housing tied to overpriced energy that is subsidised by tax policy and debt?

      • I agree. Quality houses are one in a hundred. But $200k to $300k – sorry pal, it would be lovely for you I’m sure but it isn’t going to happen.

      • “Thanks Peachy. Been here far longer than you my young Padawan. I have no feverishness – am merely stating stone cold facts. You sound like Andrew Fraser.”

        Those who have ACTUALLY been watching property for a long time (since early 2000s) would be able to tell from your delusional predictions that you ARE new to this. Your reasonings have all been heard before and you parrot them just like other crashniks hoping that a big crash will give you your ideal house at a price youre comfortable paying. Good luck with that and I am confident you’re cockiness will come back to bite you. Go travel overseas and look at other housing bubbles that havent burst, with housing metrics more ridiculous than Aust. Look at the type of housing in most major cities overseas and ask yourself will Syd and Mel likely follow (being the two most popular cities in Aust)

        Realistically Aust housing will get a modest drop (my guess is less than 20% nominally) followed by a few years of stagnating prices as fundamentals revert to more ‘normal’ levels. You are really deluding yourself thinking about 50% drops in nominal terms. LOL

        (PS. I have a sneaky suspicion that you are that gimp Brenton)

      • Jumping jack flash

        “And what determines that land price? Anything to do with demand generated via mass immigration and consumption of grossly inefficient housing tied to overpriced energy that is subsidised by tax policy and debt?”

        +1 Clive.

        The banks themselves admit that the ONLY reason houses are so expensive is the debt that was able to be obtained to pay the greedy asking prices (in many cases: – and then some!)

        So technically, it is greed, that age-old “deadly sin”, that has caused all of this. Aided and abetted by the debt – the greed of the banks.

        The immigration doesn’t help, but it is a symptom of the debt. Due to standard market dynamics, the “top end” needs cheaper and cheaper labour to create capacity to increase their own wages to repay their own vast debts. They can’t raise prices too much.

        Everyone has debt, even the “top end”.

        And when you view the economy in terms of the debt that everyone has, it also explains WHY essential living costs are so high these days. It is simply due to the gouging that can be applied to them to boost the wages of the executives so they can repay their own debt (and counter their high costs of living) and simultaneously sustain a lifestyle proportionate to the numbers of debt dollars they own.

        Mountainous amounts of debt that everyone has also explains stagnant wages, the cessation of “trickle-down”, increasingly poor mental health, family breakdowns, DV, etc, etc, etc.

      • It’s quite enjoyable to see some pals are still enjoying this “House madness” even in a crashing market. Me as a home owner (with debt) will be enjoying a falling house prices for the later generations. Hearing about life is getting easier for the young fellas out there by 10%, 20% ..50% a year is definitely good news…can’t imagine the desperate rent seekers always predicting that life will get harder and harder (named higher house prices these days) and shutting down everyone who have the slightest hope for a better future

    • ErmingtonPlumbingMEMBER

      “especially if you’re planning to live there 5 years plus”

      Only 5 years!….I moved in and rented my place for five years before I brought it 16 years ago,…been here 21 years and plan on being here another 20,…at least,….how did you come to the occupying a family home for only 5 years figure.

      My 92 year old has lived in his for 70 years!

    • “Quality family homes” in suburbs like Petersham are falling the most.

      A bubble is a bubble is a bubble.

    • …and then, one Easter, after the Spring Selling Season had failed…..”That time when house prices fell 75% in Dublin”….(NB: “That won’t happen!”. Maybe. But who saw Facebook happening last Thursday?!)

    • Torchwood1979

      Australian property halves in value every 7-10 years. Sell out now or be locked in forever!!!!!!!

    • Jumping jack flash

      North of Brisbane is a sea of townhouses, many still being built, many offering 2 weeks’ free rent.

      • These properties only get bought for the investor tax advantages – otherwise their actual value is max 300k.

  5. I for the most part agree with Martin that changes in Rent is the correct measure of housing supply, however that said, when comparing Rent changes with Property price changes across multiple countries, there’s an underlying assumption that Tenants have similar rights in all countries/ jurisdictions and this is simply not the case.
    In Australia (in particular NSW) Tenants have very few rights, indeed Landlords in NSW have the right to terminate leases for a variety of reasons that have nothing to do with the quality of their Tenants or that the rent is paid. At the end of leases (typically 6 or 12 months) landlords in NSW have the right to terminate the lease and evict the tenants with as little as 4 weeks notice, furthermore they don’t even need to pretend that they have some urgent need of the dwelling or that the Tenants are causing damage or whatever, because in NSW landlords have the absolute right to evict good tenants on “No Grounds”.
    With this in mind it is hard to compare Rent vs Property price escalation in a market where the landlord assumes an on going liability associated with the Tenancy (say Germany) and Australia where the landlord can evict even the best tenant with as little as 4 weeks notice. Like it or not the dearth of Tenancy rights shapes the decisions of all participants in the market and makes renting only a suitable choice for the very young flexible families or those that simply cant afford to buy and indeed this pre-sort also impacts the maximum rents that are possible sans ongoing Tenancy rights.

  6. Jumping jack flash

    “And I would add to the mix, too easy credit, also helped to drive prices higher, as we have discussed before.”

    Spot on.

    Enormous mountains of debt that must be repaid in full plus interest. Everyone has debt. Everyone is living with the anvil of debt, tethered by a hair, hanging over them. Just one, or a handful, of pay packets away from bankruptcy.

    Such oppressive debt is destroying not only our economy, but our society and mental health as well.

    It is well documented that living with distress is not good psychologically or physiologically.

      • Even if you are individually debt free, you are still liable to pay your share of government debt via taxes. That is if our government ever pays down debt.

      • If it gets too bad I’ll vacate the jurisdiction. Not too much of an issue. As the French quickly found out.

  7. – My view is a different one. One can compare a house to a share. It’s has a price that goes up and down. And when it’s rented out it generates an income. When one divides then rental income by the price then one calculates the yield on that piece of property. Just like a share has a dividend yield. For both the share and the rental unit the yield can rise or fall.

    • Yes, property is a cost, high costs make you less competitive as a nation.
      However individuals can make money from it but only if cash in at the right time, most won’t!

  8. If rental prices are softening, then immigration will be ramped up.
    If house prices are softening, then FHOG will be dusted off again.
    If mortgages prices are hardening, the RBA will cut rates and the government will turn their head to banking malfeasance.
    If unemployment is rising, the government will write cheques and change ABS reporting.
    If talkback radio is cashing in on rising misery, the Reject the Recession dancers will make an encore.

    There is so much that will be thrown into this sucking whirlpool of a manic bubble, that although water will be seeping through the drain hole it may be some time before you hear the sucking sound – the sound of inevitability. What may speed it up is external factors such as a weak domestic Chinese economy… which is a real risk.

    House prices will decline 50-70% MINIMUM in real terms from the peak. But it may not be as quick as some predict.

  9. I called bubble in the late 90s. Unlike many here who have thrown in the towel and have swallowed the ‘Australia is different’ kool aid, I still see MASSIVE falls. But hey, so far I’ve been wrong. Nobody really knows….so all this talk is kinda pointless.

    Let’s just wait and see.

    • Wrong for 20 years = wrong.

      Doesn’t mean that there is no bubble, but it means you have prognosticated incorrectly.

      • Take another swig Peachy. You seem to have your own bottle behind the bar.

        Wait and see….

    • ah 1998
      A decent Sydney house might cost $300k, a good wage was $40k and a lovely home in Tasmania sold for $100k.

      Sydney was double its long term average but all the other places were still at around 3x-4x a normal wage. It seemed that Sydney prices should at least halve to make things normal again.

      But there was no revert to mean this time. Everything else eventually got up to Sydney wage multiples. Even friggin Hobart now has a housing shortage with poor buggers living in tents in the showground.

  10. Its not people with a loss that will drive down prices, its people that have had good double digit growth that are willing to take a hair cut

  11. kiwikarynMEMBER

    What happens when trade wars hit Chinese over indebted businesses, and the urban Chinese start to lose their jobs? Faced with no income, and needing to keep paying the mortgage on their over priced Chinese apartment, are they going to look over to Australia where they have an investment property that they bought and kept empty, and knowing that both Australian property prices and the Australian dollar are falling, will they decide to HODL? Nah, if things fall over in China there will be a flood of foreign owned IP’s hitting the market – lets see how house prices fare then. Pass the popcorn.

  12. Is this guy as moronic as Steve Keen?
    It seems so. How can he not be aware of the bag of tricks the government has to keep the ball rolling?
    How about PR for any Chinese investor that puts in > $700K into an Australian property?
    Then lets expand that to any Indian willing to cough up.
    Then lets give the Gen Y a break and let them spend their Super on a property.
    The crash may come, but we’re not even close.

    • The gubmint kept kicking the can till they kicked the bloody thing into a cyclone of their own making. Now it’s coming back at 200km/h and there is nothing that can be done to stop it.

  13. She makes the point that rents have hardly risen at all over the past decade, signalling no lack in property supply.

    Overall, rent increases are clearly not keeping pace with soaring property prices in all major capital cities in Australia. So claims that a housing shortage is the principal cause of a lack of affordable housing are unfounded.

    This is the same shortage-denier rubbish I have refuted many times.

    Here is the simple truth.

    * High rents indicate severe shortage.
    * rents were high in 2008 and rents are still high in 2018 – indicating severe shortage.

    * Price to buy is also affected by credit – lending and INTEREST RATES.

    In the last decade interest rates have fallen and some people believe that this factor alone explains the huge rise in house prices.

    Conclusion:

    Houses are unaffordable to rent due to extreme shortage

    Houses are unaffordable to buy due to extreme shortage manifesting in extremely high prices due to credit conditions.

  14. I’m not seeing the mid to low end of the market dropping that much. I’d like to but I envision as long as the negative gearing policy still exists, the die hard mid to wealthy investor types, will continue to buy property, even if it’s just for rent rather than property value increasing.

    It seems extremely unlikely these 2 bedroom unit / townhouses in the outer suburbs will go from 550 / 600k to 300k. I could see them dropping 10% maybe even 15% but ultimately drops are normally at the high end of the market.

    With negative gearing and insane immigration here in this country, we continue to blow hot air on to the fire. It might be finally phasing out, slowly but we’re doing our best to keep it going.