Insights into our property markets from Shane Oliver

Currently there are so many mixed messages about our property markets.

And recently there have been suggestions that our property markets are peaking and prices may fall in the future.

So to get a better understanding of what’s going on and what’s ahead I recently spoke with to Dr. Shane Oliver, Chief Economist with AMP on my Real Estate Talk show.

He had some fascinating insights, so here’s a transcript of the interview:

Kevin:  To get an  insight as to what’s happening in the property market, Shane Oliver is Chief Economist of AMP  joins us.AMP-chief-economist-Dr-Shane-Oliver

Shane,  I see that you’re predicting a possible fall in the Sydney and Melbourne markets in the coming years.

Shane:  It certainly is an interesting property market around Australia at the moment, and you’re right to say that it’s very hard to generalize because we have several capital cities.

Perth and Darwin  are seeing price falls, whereas at the other end, you have the Melbourne and Sydney property markets that have been seeing very strong gains.

My feeling is when I look at the impact of the measures by APRA, the bank regulator, to try to slow the property market down, those measures seem to be starting to impact.

I think we’re really seeing the heat coming out particularly from the Sydney property market, and I think in the next year or two, that’s really going to slow down, and we’ll probably see price declines sometime around 2017.

Kevin:  Some commentators are saying that any declines that you’re foreshadowing, if they come into effect, are really going to bring us back to what would be a normal market.

What’s your feeling about that?

Shane:  I think there’s no doubt that the Sydney and Melbourne property markets have become abnormal.

They’ve become way too hot.

Earlier this year, we were seeing auction clearance rates around 80%, which is way, way too high.

Investors were playing a huge role in driving those markets, and price gains were up to around 20% particularly in Sydney, so the market had become too hot, too speculative.

It really does need to cool down.

In just a couple of years, prices in Sydney had gone up by about 40% which is way, way over the top, way out of line with what we’ve been seeing elsewhere in Australia.

Kevin:  How would you assess the moves by APRA? Have they been effective?

Shane:  I think the moves by APRA have been effective.

They first announced that they were going to do something about it late last year, and nothing much happened through most of the first half of the year but then as time wore on, particularly when you got to June and July, it was clear those measures were really starting to bite, with many banks increasing mortgage rates for investors, announcing lower loan-to-valuation ratios and also tougher income tests.

What we can see – it’s still early days –is that lending to investors is really starting to cool in the last few months, so I think the APRA measures have helped even though it took a bit longer than one might have expected.

Kevin:  We’re already seeing some of the auction markets, particularly Sydney and Melbourne, starting to slow down. Is that just seasonal, or do you think it’s just a case that buyers are maybe being a bit tougher with their negotiations?

Shane:  There are a couple of factors going on here.

The number of investors out there looking for properties has cooled down and those who are out there are being a lot tougher.

And the price gains of the last few years have seen a big increase in the number of homeowners who have felt now is a good time to get our house on the market. That’s also impacting.

All of these things are coming together, and the Sydney auction clearance rate has now been below the 70% level for about five or six weeks in a row compared to earlier this year when it was consistently above 80%.

It looks to me like it’s well and truly cooled down.

Kevin:  Of course, this is supposed to be the peak selling time of the year. Is that cause for concern as we head into 2016?cycle

Shane:  There’s no doubt that the slowing we’re seeing would be a concern for real estate agents and for those homeowners who do want to sell, but if you’re a homebuyer, it’s good news.

It’s also good news for the Reserve Bank who were worried that the Sydney and Melbourne property markets were too hot and that they were going to cause some sort of imbalance in the economy.

Now that things are cooling down, it actually gives more scope for the RBA to consider cutting interest rates further.

Yes, some would be not enjoying this and would rather see stronger markets continued, but I think in the interest of national stability and giving the Reserve Bank more flexibility on interest rates, a cooling of our property markets is what we really need.

Kevin:  Shane, what’s your advice for investors as we enter into what is probably a fairly unpredictable market?

What approach do you think property investors should be taking?

Shane:  I think property investors at this stage really need to be a lot more cautious. That’s the first thing to note.

If you’re thinking of investing in Sydney or Melbourne, I’d be very cautious at the moment. In fact, I’d probably be staying away.

In the other cities, though, you can probably still afford to have a look around.

The Brisbane property market looks like it might be picking up a little, getting a bit more momentum in it, but don’t expect it to get overly strong because those APRA measures will also weigh on investor buying in the Brisbane market along with the other capital cities.

It’s really a time to take your time, get out there, kick the tires, make sure you’re getting into an area where there is going to be good tenant demand, you’re not going to have vacancy problems, and also just don’t buy in areas that have recently seen rapid price gains because I think those rapid price gains could evaporate more quickly.

You really should be looking at areas that haven’t participated in the strength that we’ve seen, particularly in Sydney and Melbourne, and where rental yields are a lot more attractive than you see in Sydney and Melbourne.

Kevin:  Of course we’re aware that the property market cyclical.

Where do you think we are in the cycle, or is that too hard to generalize on an Australian property market?

Shane:  If you look at the national average, price gains have been rising for the last couple of years now, obviously led by Sydney and Melbourne.

That’s now turning down, so I think we’re in the downturn phase at a national level.

In Sydney and Melbourne, though, that downturn is probably going to be more pronounced.

In Brisbane, though, I think we’re still in the earlier phases of modest growth.

Price growth in Brisbane has been running around 4% to 5%, and I suspect over the next few years, that might well continue.

Whereas if you flip across to the other extreme, say, Perth and Darwin, they’re still being affected by the mining downturn.

They’re seeing price declines, and I think those price declines probably have a bit further to go.

You can look at the national figures and come to one conclusion – it looks like we’re in the early rollover or downturn phase or slowdown phase – but you really have to look at it city by city because they do vary so much around Australia at the moment, which in fact, is an unusual occurrence.

Normally, they’re a bit more correlated.

Kevin:  I noticed too, Shane, the banks moving to increase interest rates.

Shane:  That is largely in response to measures that APRA, the bank regulator, put through a month or so ago to ensure that banks have higher capital set aside for any lending into housing.

Of course, as soon as they have to put more capital aside, it means that the cost of funding goes up.

It’s like a business running where it has a higher cost.

They’ve thought, “What do we do? We could either cut deposit rates, or we could increase our prices on our mortgages.” Of course, they’ve chosen to do that.

What it does do, though, is add a bit more uncertainty to the property markets – in the short term, it could be a bit of a dampener.

But it also puts pressure back on the Reserve Bank to consider cutting interest rates again because the last thing Australia wants at the moment is higher interest rates for existing homeowners.

I think that would be a really bad thing, so hopefully the Reserve Bank will be attuned to this and consider cutting interest rates in the next month or so.

Kevin:  In the past few years, on Melbourne Cup Day, they seem to have cut interest rates. Maybe they’ll do it again this year, Shane.

Shane:  That’s right. The Melbourne Cup Day does have a good track record. Not last year, but for all the years before – I think most of them – we have seen a move either up or down on Melbourne Cup Day.

My betting is that they probably will put through a cut this coming Melbourne Cup Day which is November 3rd.

Kevin:  That’s right. Indeed, it is – not too far away.

Shane Oliver, thank you so much for your time.


Listen to the full show at and while you’re there subscribe and receive our weekly podcast (or the transcripts) where I interview Australia’s leading property experts. 

You may also be interested in reading: Are rental guarantees as safe as they sound?

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