Australia housing downturn – how bad can it get?

Headlines of falling home values can be unsettling, which is why we lift the lid to see what’s really happening in the property market.

As a home owner, news of a property market downturn is never welcome. But it pays to understand what’s really going on.

The property market is mixed right now

First up, let’s address the main issue – the extent to which home values have fallen.

The latest figures from CoreLogic show that over the past year to 30 April 2019, home values nationally have dropped 7.2%1. However, like all averages, this doesn’t paint the full picture.

Sydney and Melbourne have seen values drop 10.9% and 10.0% respectively in the last 12 months2. But these figures need to be put into perspective.

Philip Lowe, Governor of the Reserve Bank of Australia (RBA), recently noted that even after allowing for the declines in value, Sydney prices are still 75% higher over the decade, and 70% higher in Melbourne3.

As Lowe observed, “Most home owners remain in a strong equity position.”

Importantly, home values are not falling right across Australia.

According to CoreLogic, values have risen in Adelaide (up 0.3%), Hobart (3.8%) and Canberra (2.5%) over the past 12 months4. Plenty of regional areas are also experiencing rising prices including the Riverina (up 6.4%), Ballarat (up 5.9%), and the Coffs Harbour region of New South Wales (up 2.6%)5.

Why have home values dropped?

Previous home price corrections have typically been the result of rising interest rates or higher unemployment. But that’s not the case at present. The RBA6 has acknowledged that right now, we’re seeing key supply and demand forces at work.

On one hand, the building boom of recent years resulted in a significant increase in the supply of new homes. The Housing Industry Association (HIA) says approvals for new units averaged almost 30,000 per quarter for the three years of 2015-177.

On the demand side, fewer overseas investors are active in the market, partly in response to authorities in China making it harder to move money offshore. In addition, several lenders including AMP, the Commonwealth Bank and Westpac no longer provide property finance to self-managed super funds (SMSFs), which has cooled demand from SMSFs planning to borrow to invest in residential property.

At the same time, banks and other lenders, spooked by the Royal Commission and other enquiries into the financial sector, have tightened their lending criteria.

Could prices fall further?

Market movements are always hard to predict, however CoreLogic head of research Tim Lawless says, “housing market conditions may have moved through the worst of the downturn.”

A variety of factors will help to put a floor under home values.

Already, the HIA reports a slowdown in building approvals. House approvals fell by 4.8% during the March 2019 quarter, which follows from steady declines during 20188. This will help to tighten the supply of new homes9.

Bear in mind too, the property downturn is occurring at a time when unemployment is at its lowest level since 2011, and this is expected to put pressure on wages growth10. Interest rates remain at record lows, and the RBA has even hinted that rates could fall further11. In the meantime, a number of lenders have lowered their fixed home loan rates ahead of any possible cut to the official cash rate12.

On the demand side, over the next 10 years Australia's population is projected to increase by 1.4-1.8% annually13. This will mean another 3-5 million people all looking for a home, which will help to support demand.

Could you benefit from today’s market?

Lower property values will be embraced by first home buyers, investors (who are now enjoying higher rental yields) and anyone with plans to upgrade their home.

If you’re thinking about seizing the opportunities offered by more affordable home values and record low interest rates, speak to your local Mortgage Choice broker to discover the options that could work for you.

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7, 9 HIA Building approvals lowest in 5 years 4 February 2019