Australia’s leading housing economist gives his forecasts for property prices

What’s really going to happen to our property market?

Are they going to crash like so many economists and market commentators are suggesting?

Over the weekend I saw a headline suggesting the recent unemployment figures will be the final knockout blow for our housing markets.

You see…unemployment has now fallen to a 48-year low of 3.5 per cent and while many see this as a good thing, the stunning June jobs data all but guarantees the Reserve Bank of Australia will lift the official interest rate by at least 0.5 percentage points again in August, with some economists even tipping a 0.75 percentage point increase.

Now I agree the RBA is going to have to ramp up interest rates and this will further stunt consumer confidence because, of course, that’s what it is intended to do.

And yes…property values will fall, but I can’t see falls of 15%-20% and definitely not 30% as one prominent commentator is suggesting.

Fact is.... property price falls of this magnitude have never happened before.

Not during the recession of the 1990s, not during the Global Financial Crisis and not during the period after the credit squeeze of 2017-18.

In fact, the largest annual fall in modern history was when the “overall” Australian property market fell 5.5% in 2018.

The largest peak to trough fall – the drop in house prices around Australia from their peak values to the bottom of the cycle - was recorded in 2018-19 when Australian property values fell 9.9%.

Back then, just like today, we were being bombarded by scary media headlines of an impending property crash.

At that time we had just worked our way through an APRA-induced credit squeeze, the Haynes Royal Commission on Banking and were concerned about the upcoming election with Labor promising to cut negative gearing and other tax incentives to property owners.

There is not “one” Australian housing market

Sure there will be a housing market correction - in fact it started at the beginning of the year in Sydney and Melbourne - but property values are still increasing in Brisbane Adelaide and Perth.

History shows it that each market behaves differently and that there are markets within markets – houses, apartments, townhouses and villa units, located in the outer suburbs, middle ring suburbs, inner suburbs and the CBD of each capital city.

Then there are hundreds of regional property markets and, as I said, they all behave differently.

The following chart shows the largest peak to trough house price declines in our various capitals since modern records were kept in 1987.

And there is no reason to suggest this correction will be worse than the ones we’ve experienced in the past. 

Our housing markets are facing some headwinds

These include:

• Consumer confidence has taken a significant hit and that's affecting our housing markets with buyers being more cautious and many taking a wait-and-see approach, while sellers’ confidence is more fragile.
• Fear of rising inflation and cost of living pressures is sidelining many property buyers.
• Rising interest rates are reducing borrowing capacity
• Uncertainty about our economic future with all the talk of a recession overseas, ongoing geopolitical problems, and the share market falling is dampening buyer and seller confidence.
• Affordability issues will constrain many buyers: The impetus of low-interest rates allowing borrowers to pay more has worked its way through the system.
  Now, with property values being 20- 30% higher than at the beginning of this cycle - and at a time when wages growth has been moderate at best and minimal in real terms for most Australians - this means that the average home buyer won’t have more money in their pocket to pay more for their home.
• The pent-up demand is waning: While many buyers delayed their home-buying plans over the last few years because of Covid, a significant volume already made their move. There are only so many buyers and sellers out there, so we can expect there will be fewer looking to buy in 2022.
• FOMO (Fear of Missing Out) has disappeared: Buyers are being more cautious and taking their time to make decisions. This is in stark contrast to last year when many took shortcuts to enter the market.

On the other hand, there are many strong fundamentals underpinning our housing markets

These include:

• There is a shortage of good properties for sale and virtually no properties to rent.
• International immigration is picking up and this will increase the demand for housing.
• There is little new construction in the pipeline – we’re just not building enough dwellings and increasing construction costs at a time of a shortage of labour means the end value of new projects will need to be up to 20% higher to make projects financially viable for developers.
• Our economy is still growing strongly and is very resilient.
• Unemployment is at historically low levels meaning anyone who wants a job can get a job (so they'll be able to pay the mortgage repayments.)
• Wages are starting to grow.
• Household balance sheets are strong - we have a ‘natural buffer’ with $250- $260 billion in aggregate savings nationally much of it in offset accounts.
• Many borrowers are ahead in their mortgage payments - Matt Comyn, chief executive of Commonwealth Bank recently said that three-quarters of their loans are approximately two years ahead on repayments.
• We have a strong banking system that has been strict in its lending criteria, meaning there are very few non-performing loans.
• There are still Government incentives to encourage first-home buyers into the market.

Property Forecasts for 2022.

The last few years have shown us how hard it is to forecast property trends… but recently Dr Andrew Wilson, chief economist of My Housing Market made the following projections for house price growth over the calendar year 2022.

• Sydney property values will end the year down -6%, led by the more expensive end of the market, but this is after home values increased by 31.6% over the last 3 years.
• Melbourne property values will also fall -6% over the calendar year after growing by almost 19% in the last 3 years.
• Brisbane property values will end the year 11% higher
• Adelaide property values will grow by 12% in 2022
• Perth property values will finish the year 9% higher
• Taking a weighted average, the overall Australian mean property value will end up much the same as at the start of the year, after increasing 30.8% over the last 3 years.

The bottom line

We've moved into this next adjustment stage of the property cycle faster than some expected, pulled forward by an earlier and more aggressive interest rate tightening cycle due to the RBA's response to a surprisingly strong surge in inflation.

While much of this is due to offshore factors that can be expected to ease over time, the high starting point for inflation and tight labour market domestically means the RBA is moving aggressively on interest rates – taking them from COVID 'emergency' lows to more 'normal' levels.

And while all this will dampen consumer confidence and slow our property markets, there is no property crash in sight.

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.