After five years of growth between 2012 and 2017, the median property price across state capitals dropped about 5 per cent in the 12 months to the start of November, says CoreLogic, led by annual falls of 8 per cent in Sydney and 6 per cent in Melbourne.
Property prices had overreached at the top of the cycle in Sydney and Melbourne, as values wandered into territory where potential buyers found them unaffordable.
The retreat in those cities has been made worse by borrowers – especially investors – facing tighter than usual lending restrictions, due both to regulatory changes and the big four banks projecting outwardly (somewhat obviously) that they are getting their houses in order prudentially during the banking royal commission.
In contrast, smaller capitals – notably Canberra and Hobart – outperformed the broader market in 2018, buoyed by interstate investors seeing value in these locales.
In 2019, I think we’ll see a convergence in performance of our capital cities.
Prices in these large capitals may have fallen by a further 3 to 5 per cent by Easter, at which point they may plateau for the rest of the year. In absolute terms, I expect prices in Sydney to be about 12 to 14 per cent lower than their peak of September 2017 and prices in Melbourne to be 9 to 11 per cent lower than their peak of November 2017.
Unlike many other commentators, I don’t think the likely change of federal government expected in May will be that significant a factor for the market.
The grandfathering provisions in Labor’s negative gearing and capital gains plans should smooth out the transition to the new regime. The market will be boosted in the months leading up to implementation as some investors jump in to try to beat the change of rules, which may actually cause prices to stabilise sooner than my Easter prediction. Indeed, I know of investors who are looking to transact as soon as they can.
The biggest risk is an excessive delay between the election and the proposed policy becoming enacted, because it will artificially concentrate most of the year’s transactions into the period before the changeover, creating unwelcome distortion to the market.
I am sceptical that the positive growth of smaller capital cities can be sustained for much longer. The perceived value on offer over and above larger cities’ assets is shrinking, especially when considered in the context of the far larger economic and population base and steeper growth trajectory of our major cities.
So prices in our smaller cities are likely to plateau in autumn and then fall up to 5 per cent across the rest of the year.
There will be a further and welcome contraction in the supply of new high-rise property in our capital cities, which will extend the outperformance of apartments – particularly older-style units – relative to the broader market from 2018.
Should these outcomes eventuate, it will be painted by some as the popping of the property bubble.
In reality, a measured recalibration of prices represents a well-needed breather for the market. And while it is inevitable and regrettable that some marginal borrowers will be hurt, most property owners of mainstream residential assets in our major capitals will be unaffected. And of course, there will be greater affordability for first-home buyers.