Why Australia’s property market could crash

AMP chief economist, Shane Oliver, has updated his forecasts for Australia’s property market, predicting peak-to-trough falls of 10% to 15% nationally, led by Melbourne where prices will crash between 15% and 20%:

Further falls in home prices are likely. High and still rising unemployment (with “true” unemployment absent government support measures estimated to be just above 11%), the collapse in immigration which has reduced underlying dwelling demand by around 80,000 dwellings a year (see the next chart which shows the collapse in population growth relative to housing completions) and the depressed rental market will likely combine to drive weak housing demand and increased forced sales. JobKeeper, increased JobSeeker, bank payment holidays and other support measures have so far helped head off a sharp collapse in prices but the market has still weakened anyway and we expect an acceleration in falls as support measures start to be tapered from the December quarter. Sydney and Melbourne are the most vulnerable given their higher dependence on immigration, higher debt to income ratios, higher house price to income ratios and greater investor penetration.

The resurgence of coronavirus cases and the renewed negative impact of this on the economic recovery via Melbourne’s stage 4 lockdown, the reversal of some reopening measures in the rest of Australia and reduced confidence has caused us to revise our base case for the decline in national average property prices down to a 10 to 15% top to bottom fall (from a 5 to 10% fall). However, this masks a wide divergence between cities with Melbourne likely to see a 15-20% decline (of which its already fallen 3.5%) partly reflecting the bigger hit to its economy from its ongoing lockdown, Sydney prices likely to see a 10-15% decline (of which its already fallen 2.1%) whereas Adelaide, Brisbane & Hobart are only likely to see falls around 5% and Canberra prices are likely to be flat to up. Perth looks a bit more fragile despite having seen a 22.3% decline from its 2014 high and so prices there are likely to fall 5-10%.

However, if the resurgence in coronavirus cases in Victoria morphs into a broader “second wave” of cases across Australia necessitating a renewed economy wide lockdown and a renewed broad based downturn in the economy then the likelihood of a 20% plus decline in prices will escalate. We are also assuming more government stimulus to be announced in the months ahead – but if it’s not forthcoming it would also add to the risk of a sharper fall in property prices than in our base case.

Good analysis. Let’s recall the gale force headwinds facing the Australian property market, especially Sydney and Melbourne:

  1. Stubbornly high unemployment and falling household disposable incomes once emergency income support and early superannuation access is reduced from October.
  2. Collapsing immigration, particularly into Melbourne and Sydney.
  3. Rising dwelling supply and falling rents.
  4. Ending of mortgage repayment holidays, currently assisting nearly 500,000 borrowers holding $195 billion worth of mortgages (11% of total outstanding).
  5. Tightening credit availability (despite low rates) as lenders become increasingly concerned about borrowers’ ability to repay.

The big risk is that a significant share of Australia’s 1.3 million negatively geared investors, sandwiched between falling property prices and rents, sell en masse.

If this occurs, then Australia’s property market could become caught in a feedback loop of forced sales and falling prices.

Leith van Onselen
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Comments

  1. perhaps first time home buyers could be allowed to dip into their superannuation savings to get on the property ladder, as previously proposed by the fast assh0le Hockey?

  2. happy valleyMEMBER

    “… as lenders become increasingly concerned about borrowers’ ability to repay.”

    What’s this repay “notion”? That’s so unStrayan – surely, lenders aren’t expecting repayment because after all the lenders started the problem with their irresponsible lending.

    • working class hamMEMBER

      Most banks would love low or no risk borrowers permanently on the hook for 4-5 times their annual income.
      Anecdata
      Have been knocked back for loans before, combining residential and commercial, for it being not profitable enough for the bank.
      Actually had multiple big 4 employees from different banks, tell me straight up. My repayment history was not ideal for them, too much work for not enough reward.
      Some even chuckled about it. More than happy to help if I doubled my loan though.

    • Jumping jack flash

      Repay in this context means not being able to get enough for the property when they sell it to cover the remaining balance on the loan plus the interest [plus some left over for “capital gain”]

      Only the greatest kind of fool actually repays a loan with their own money, the real winners use a pile of someone else’s debt that is large enough to cover the remaining balance plus interest, plus give them the expected amount of capital gain.

      The whole system relies on debt repaying debt. That’s why if the debt doesn’t grow fast enough it all falls over.

  3. What analysis did Shane give his board of directors 10 years ago about going balls and all on SMSF IP’s.
    He like so many other are frauds and continue to babble nonsense.

    • True. All these forecasters history should be recorded and exposed. It really is a lottery.

  4. For Aussie RE to have even a remote chance of crashing (a crash is >20%!) with all the outrageous supports already in place and which will continue to be implemented, immigration plus the ability for foreigners to buy RE needs to be halted for 2 years. At least.

    * Immigration (and temporary visa holders, int. students, etc.) is going to start within months.
    * Foreign buyers are still buying and haven’t stopped.

    Sydney and Melbourne will be minimum 15% higher this time next year. There’s absolutely no doubt.

    • – Lending rates will drop further, under 2% already
      – interest only periods extended forever
      – govt will guarantee billions of $ of new loans written by the banks
      – super will be released to buy property
      – first home buyer has a place incentives

      • all the tricks you listed have already been used and fully consumed – nothing is left there

        – how low will rates go down? -1% (that’s how much RBA needed to drop rates in post 2012 period to engineer a price boom)
        – when IRs are low, even significant drop in rates generates very little savings because principal part dominates (from current levels dropping rates by 50% only drops repayments by 10% to 15%) e.g. if rates drop from 2.5% to 1.25% mortgage repayments drop by 15% only, when rates fell from 7% to 3.5% between 2012 and 2017 repayments fell by 35%, in 2008 rates fell 9% to 4.5% and repayments dropped almost 40% overnight
        – introducing IO loans helps lure more people in, just keeping IO loans permanently does the opposite because it makes sure those people never return onto market for without selling – in the absence of inflation/wage growth they become permanent debt slaves
        – this only works when people have problem with deposits or tough lending criteria nut not now – government can issue mortgages but that doesn’t changes much when repayments are the problem
        – the trick of releasing super to buy property has already been used a while ago via SMSF. if a significant money gets withdrawn banks will suffer in stick prices loses and supper fee loses
        – FHBs became a tiny portion of population, most of them either purchased already or are in position so far from buying. Also don’t expect new kids forming households to even thing of buying because they will need a job first and food delivery hardly provides enough for property purchases.Also government seems to be focused on saving developer mates so all FHB grants are given for new builds which doesn’t help existing stock, in fact it will make house prices drop more because FHBs who would otherwise buy an existing property are now being shifted to new market leaving growing unsold stock even more vulnerable.

        • Strange EconomicsMEMBER

          50% of FHBs in the inner city are actually Parent FHBs. Students buying houses? Its a boomer parent investment getting an FHB grant for the family. Check out any weekend Domain article – nice stories of “Uni Student buys 1 million terrace”.

          They will stop when they see that prices go down 5 % a year as its a capital gains play.

    • That’s a big claim – you must have deep insights into the mechanics of the market, not to mention a crystal ball that can tell how bad (or good) the medium term future’s gunna be. I would say the stage has already been set for a minimum 20% fall, but let’s see.

    • With Australia now pursuing elimination ( even if it hasn’t been announced) and there being a possibility of no vaccine, next to no immigration for two years is a distinct possibility.

      • Agree. The Vic stage 4 lockdown has ensured the voter fallout from an immigrant-led 3rd wave would be electoral suicide for Scummo and Dan, plus anti-immigrant sentiment may finally stir from the mass of unemployed.

        And after 12 months it’s dead in the water anyway.

        See ya immigration Ponzi

    • JK would have to end in quick order too.
      It tapers, what, 30% end Sept, to Dec, taper again, then to March.
      Some will pick up a new job (if they have skills), some will try and sell, some will hope for a vaccine, some will bet on more JK…

    • I no longer have an opinion – the Western World has gone into a state of total insanity that I would never have thought possible. Every time I think it has reached its zenith the insanity gets another rocket boost.
      However, how many times over how many years have we got excited over a ‘crash’ in RE prices only to see it rocket up even faster.
      Possible scenario – Wuhan Covid is used as the excuse to remove all cash money. Now you can go negative 10% or more rates. There is no limit! Where would RE prices be then ?

  5. does supply matters?
    some who thinks supply side has much if any effect on house prices, just by looking into that supply side chart one would think prices fell in 2015-2018 because but in fact prices increased 30%.

    Also, how it’s possible to witness 15% price fall in 2018 when economy was doing as fine as in 2015 and yet think it’s impossible to see falls bigger than that now when almost half of workforce is on welfare?

    • You’ll find that foreign purchases were absurdly high during 2015-18 (NAB has pretty charts on this). Now, it’s simply disgracefully high.

      Foreign buyers reduced in 2018.

      It’s all about inflated demand drx. Foreign buyers, immigrants and temporary visa holders not only keep Australian property prices from crashing, they continue to inflate prices to obscene levels. It’s simple.

      • I agree it’a all about speculative demand … but I would disagree about where that demand is coming from. Most of speculative demand in Australia is domestic driven by millions of NG property speculators, not by foreigners (immigrants are part of domestic demand) and that’s why mortgage debt was rising by hundreds of billions of dollars during that period

        to push prices up now we’ll need new hundreds of billions of dollars every year, it’s hard to see where would those come from when over half of population is dependent on welfare

          • Strange EconomicsMEMBER

            Foreign cash buyers set the marginal maximum price, above the limit that even 5 times income gives locals. So 10% off when no foreign buyers.

        • Lots of laundered money coming out of china, there is a reason they are the most rampant gamblers on earth. You dont need debt if you have dodgy cash you want to park away from your CCP overlords.

          Its a safe haven for them, its not about the property.

    • Mr Oliver has to balance a) a no brainer house price fall, with b) not overly talking down the market. Hence his estimate.

  6. 10-15% is a crash? Really? Sydney prices gained 70% from 2012-2017. Some crash! Wake me up when it’s 20% plus…

    • exactly, people can see 50% price rise with no change in real economy but cannot see 20% fall when economy crumbles to nothing?

      BTW.
      It’s already possible to find 20%+ discounts around in Sydney

    • Interest rates at record lows offer some support for price gains. But only helps if you have a job..of course.

    • Goldstandard1MEMBER

      Have a think. They can’t say 70%, they can’t even say 40%. You start with admitting a fall then revise estimates as it gets worse.
      Hello??

  7. reusachtigeMEMBER

    Oh no! A bit of extra negative sideways movement back to 2018 prices. Crash!!!!

    Hey bloke, can you stop using hype man?

    • Heh, I know, up 10% in the last year, down like 1% in the last few months. Overall, up 9%

      Figures are approximate only

  8. Engineer Tragic

    I think Shane Oliver gives a really balanced analysis – recognises the significant headwinds without indulging in too much hyperbole. A drop of 10-15% nationally feels about right for next 1-2 years, with Melbourne higher.
    I agree with LVO’s summary of headwinds but I would note that investor sales are an outcome, not a cause, of these macro forces. The big unknowns as Shane correctly mentioned are how much additional govt support will be rolled out (tailwind) and the tenacity/resurgence of Covid19 (headwind). My contribution:I think that each of these 2 forces will act to make it a long, slow grinding decline in National house prices (think Perth over the last 5 years) rather than a fast crash. Obviously it is hard to know where it will end but my central case is about 30% national drop from peak over 5 years.

    • MountainGuinMEMBER

      Thanks Engineer. And whether the aust govt and all other govts want to continue borrowing to fund stimulus leads to the question of if scarcity in lenders will drive up interest rates. That’s where it gets really nasty.

    • What would you do if you were (perhaps you are) an investor who bought in 1996 and are sitting on 300% capital gains and an uncertain economic and political future. Perhaps you aren’t getting paid rent at the moment. If that group sell they can set a new market price well below the more recent entrants exit limits.

      My point is where is the psychology in your scenario and analysis other than a saviour.

      • Good question Tonydd – FWIW I’d say the majority will just hold on. Even if the gains are only 200% there is likely no mortgage. The majority are still earning rent (not all rent will go to nil). Overlaying the Aussie psych even if you see your property decreasing in value by 20% (they won’t think it’s going to be more) you are still earning a weekly rent with no mortgage. Where else are you going to invest with the same “security”?

        • This. There seems to be this prevailing notion that everyone is going to be forced to sell.

  9. Excellent, glad to see he is also expecting more govt stimulus. Hopefully something substantial in October.

    • Went through the history for the suburb – looks like there was some irrational exuberance in 2018 – then we had the crash – price sold reflects general asking price in that area.

      Looks like someone genuinely lost half a million bucks. Wow.

    • I know this area well – it’s demographic is Italians and Greeks all aged 70+ – and one of the people I know in this area is mid 80s and nearly the youngest duck on her street.

      There is going to a mass exodus of properties on the market in Bulleen, Doncaster, Templestowe in the next ten years – as all those who build house and land packages in the 60s and had families are reaching the end.

      Up to this point these areas have been held up by Chinese buyers coming to the area (Balwyn effect) – but with all the Chinese money drying up, and all the asset holders quickly approaching death station – it’s going to create the perfect storm for areas like this.

      It won’t be the outer suburbs “working class” areas which see huge falls – because families will hold these houses and live in them for the next 20-30 years – it will be the “old money” suburbs like Bulleen which see 30-40% falls because of the sheer demographics in the next decade.

      It will provide an opportunity for savvy Gen Y’s (and late X’s) to upgrade to be closer to the city – whilst also having a ripple effect across the city pushing overall prices down more slightly in the long term.

      Also worth noting that these areas have no great public transport systems to the Melbourne CBD either.

  10. Trying to shake the strong sense of deja vu when I read articles predicting an Aussie house price crash.

    My local RE agents are still sanguine and quietly bullish in the medium term. They see lots of ways out of the current situation: vaccines and V-shaped recovery, a new medication that makes the ‘rona into a mild illness for all + V-shaped etc.

    I’m in the ‘believe it when I see it’ camps regarding both the bulls and bears.

    • Local agents NNSW – “market is fine”, “market is great!”, “lots of Sydney and Brisbane money around ” [observation: lots of go-fast Audis, Mercs, Beemers QLD plates getting about at present], “don’t read those Macrobusiness carnts and their stats, the market is fine!”

      Not joking, actual quotes. Except the Macrobusiness one. The agent actually said “don’t read the stats, the market is fine.

    • Real estate agents are by far the dumbest people of any industry – never met a bigger bunch of mouth breathing morons.

      But yeah – take their word for it. I meant you are reading the actual data, you are seeing the actual political response, you know the actual economic reality of the situation.

      I wouldn’t go down to Flemmington and ask the bookies what the future of Australia’s agri-business – they deal with horses, and hay and sh1t too – they should know right ?!

      • I am not r/\sputin’ anything you say! Yes Mick, whatever you say Mr Gatto!

        Agree 100%. Fighting their BS is hard work.

        Had a difficult convo with one y’day who was actively gaslighting/Bs-ing me. I just pushed back and she did not like it one bit,

      • Heard it all before, Mike. Seen 100 of the last zero crashes predicted. Still waiting…..

  11. Perth has had a more than 20% decline in property prices. It’s not a disaster, people just stay put especially those with loans bigger than their property value. As long as unemployment doesn’t strike and even then a few gig economy jobs can tide you over. Government could further loosen super withdrawals to help.. A house is a home and psychological pull to hold onto it is massive. As will be all forms of assistance to do so.

    All you dudes holding out for collapse to snag a bargain… 🤣

    • They are all living off job seeker with deferred housing repayments – both of those end soon. Their lives will be destroyed. ^^’

      • Are you sure they end soon? JK till March, no guarantee it doesn’t get extended as a proxy UBI

    • I hope they open Super for servicing a Mortgage I would have the house paid off and be sitting pretty…bring it on. 🤣

    • Sensible comment in relation to PPOR areas. Many parts of Syd, Melb, GC have large a investor % so I think you will see differences – “heartland” areas will be ok like you say but there will be carnage in other areas. If this plays out I think it will generally make everywhere a better place.

  12. TailorTrashMEMBER

    I think Mr Oliver like all bank economists knows what pays his salary …in the middle of a storm …engines may be be spluttering….possibly running out of fuel ….don’t panic the passengers …a minor technical issue we have it under control ….we can glide this thing to the nearest airstrip and wait it out …..10-15% is the punters equity ….as long as we keep the loan amount in the “value “of the house all good for who pays my salary .

  13. Jumping jack flash

    It is fundamentally very simple. It all depends on the debt growth.
    Debt growth over the past 10 years has been inadequate to sustain all the debt created for the past 10 years.

    If debt isn’t going to grow fast enough, something must substitute for debt growth like the government borrowing/printing/whatever the balance of the required amount of growth, and then subsequent handouts.

    Currently this balance is about 600 billion from my rough extrapolations just to break even, and just recently around 300 billion of that has been provided via the last rounds of emergency stimulus. There must be more or the whole place goes under, sucked dry by the debt, and then if they want growth on top, then more must be provided. Or perhaps by that stage the debt starts growing fast enough again?

    Its that simple.