House prices deflate – is the party over?

Average house prices are falling across Australia as the super-heated domestic property market really cools. Nationally, in the March quarter, average prices were still 2.0% higher than a year earlier, but the rot has set in and by year’s end, the national average house price will be lower than a year ago. But how low will they go? It’s the substantial housing market question right now.

As we have discussed previously, the housing market in total, contains elements that are not directly related to one another. Dwelling approvals for new construction are not entirely linked to the prices achieved for existing dwelling sales, for instance. But nor are they entirely divorced. So, no matter where you sit at the national dining table, the price of housing matters to you and your family, because most have participated in the party.

For some, living where prices rose most steeply, it matters more than for others, especially if you got in late, when prices were reaching their peaks. Worst of all is if that is you, and you live in one of the regions where average prices are falling the most.

For those who got in early, it may be they are sitting pretty, but many extended themselves (courtesy of low interest rates and booming property values) into investment properties that are highly leveraged. They could feel the hurt too, and could in fact drive prices down faster than owner-occupiers.

As the graphic below shows, those seated in the big three markets - Sydney, Melbourne and Brisbane – are all likely to face lower house prices over the next few years, on average at least. Assuming that is, they are in the process of selling.


Source: ABS

There are those who will say to people with large loans on recently purchased properties that they should stop worrying, focus on their repayments and stay where they are. 

That is fine up to a point. That point being when interest rates increase, and the large mortgage gets just too big and the property has to be sold. If that happens – or if the banks put the squeeze on and force the sale – a whole lot of people could feel a whole lot of hurt. We spare many thoughts for those whose interest-only investment loans could be impacted, but we should really care most about the over-extended owner-occupier and first home-owners in this debate.

So everyone wants to know – and some need to know – how low prices will fall and just how far.

There is no consensus.

The ABC’s Michael Janda pointed to SQM’s optimistic expectation of a 4% decline in Sydney and 3% decline in Melbourne in 2018, compared with the bearish 10% prediction from ANZ for the same markets, with smaller falls elsewhere and Canberra and Adelaide expected to see some growth. Others fall in the middle of the range of predictions.

Perhaps more worryingly, as we allude above is the prospect of a credit crunch placing further downwards pressure on house prices. Discussion around lending restrictions based on debt-to-income ratios that are below the current levels in Sydney and Melbourne could force house prices down sharply, according to a UBS assessment of considerations being undertaken by the Australian Prudential Regulatory Authority (APRA).

That may not eventuate, but there is a consensus emerging that credit tightening is already the primary driver of falling dwelling prices. Since early 2017, APRA has ‘encouraged’ banks to be more bearish on investor loans in particular. That is now having an effect.

As Janda says:

“…if the main thing holding up demand and prices for expensive homes in Sydney and Melbourne is a belief that a large price fall is not possible, then you are firmly in bubble territory.”

Will that bubble burst, causing angst across the country’s kitchen tables as the party ends? It is still too soon to tell, but the air is definitely leaking from the balloon.