Property prices at a turning point in Australia

Property prices in Sydney appear to be at turning point with Melbourne, perhaps, following up close.

What happens next is the $7.4 trillion question – the combined value of Australia’s 9.9 million residential dwellings – with more than half of that value in Sydney and Melbourne.

Over the past five years, prices in Sydney have registered an average annualized rate of more than 11 per cent and by more than 9 per cent in Melbourne.

But the worm is turning. CoreLogic figures show that while Sydney prices are up more than 7 per cent over the past year, they are down over the past 3 months, albeit by less than 1 per cent.

Price growth in Melbourne is slowing. While prices in the southern capital are up by more than 10 per cent over the past 12 months the growth has slowed to under 2 per cent over the past quarter.

The Australian Prudential and Regulation Authority’s actions aimed at slowing the banks’ lending to property investors are working with a marked slowdown in investor borrowing and improved access to finance for first home buyers.

After years of being a sellers’ market there are signs that Sydney, at least, may be about to become a buyers’ market.

Despite being well into the spring selling season, auction clearance rates are falling in Sydney and flat in Melbourne.

Auction clearance rates are a leading indicator of where property prices are heading.

Buyers’ market

Sellers are less optimistic about prices they will fetch in Sydney while the optimism of sellers is holding up in Melbourne, according to a survey of more than 3000 sellers by OpenAgent, a site that matches real estate agents with sellers, buyers and renters.

Marta Higuera, OpenAgent co-founder, says the survey confirms that Sydney’s property price confidence has been slowly eroding since the beginning of the year.

Long-time property market analyst Louis Christopher, the managing director of specialist property researcher SQM Research, has modelled a “base” case that would see Sydney prices grow by at least 4 per cent during 2018 and Melbourne prices to grow by at least 7 per cent.

The base case assumes no interest rate rises and no further action by the Australian Prudential Regulation Authority during 2018 to further slow the growth of property investor lending.

However, on Christopher’s estimates, if interest rates were to rise by 0.5 percentage point during the second half of next year, the minimum rise in Sydney prices would be 3 per cent instead of 4 per cent.

The minimum rise in prices in Melbourne would be 5 per cent instead of 7 per cent under the 0.5 percentage point rise scenario.

Shane Oliver, the chief economist at AMP Capital Investors, continues to expect a 5 to 10 per cent fall in Sydney and Melbourne, over the next two years – maybe less in Melbourne given its strong population growth.

However, a crash is unlikely, as the Australian property market is a lot more complicated than a doomsday scenario requires, he says.

First of all, only Sydney and Melbourne have seen sustained and rapid price gains in recent years, he says.

Prices have risen over the past year in the other major cities by less than 5 per cent, with falls in Perth and Darwin.