Sydney housing prices could fall 4 per cent next year, triggered by a sharp decline in affordability, interest-rate stress that forces some owners to sell and rising unemployment, the latest Housing Boom and Bust report by consultancy SQM Research predicts.
Home values in Melbourne, Canberra, Hobart and Darwin are also expected to drop, dragging prices nationwide down 1 per cent.
Worsening affordability fuelled by ongoing interest rate rises is predicted to slash Sydney house prices by up to 4 per cent next year. Oscar Colman
Report author and SQM managing director Louis Christopher said the mounting impact of the 4.25 percentage point interest rate increase since May last year – with more to come, potentially – would finally hit homeowners and aspiring home buyers.
“We’ve now entered a restrictive interest rate environment. At 4.35 per cent, it is now high enough to deter would-be homebuyers and cause stress for existing homeowners, especially those who bought in the last two years already showing signs of distress,” Mr Christopher told The Australian Financial Review.
“We also believe that we’ve reached the peak in terms of strong migration growth and leading indicators such as auction clearance rates have been deteriorating in Sydney and Melbourne in recent weeks, which is giving us a bit of an indicator that we’re heading into a slower market.”
Since January last year, distressed listings in NSW have jumped 78 per cent to 1293, SQM data shows.
“We’ve seen a spike in distressed listings since early September this year, and they’ve been rising week after week since the beginning of October,” Mr Christopher said.
The prediction – one of four possible outcomes in the SQM report and the one Mr Christopher calls the base case – assumes that interest rates will be capped at 5 per cent, population growth will slow to 460,000 or less and the unemployment rate to hit 5.5 per cent.
The expected slowdown in the economy would hit Sydney and Melbourne harder than other state and territory capital, making their housing markets more vulnerable to sharper downturn, but was unlikely to trigger a sharp decline, Mr Christopher said.
“We’re not forecasting any type of crash by any means because the severe housing shortage and still fairly strong population growth are going to create a buffer to stop any type of double double-digit housing price correction for next year,” Mr Christopher said.
“Nevertheless, with expected slowing employment growth and the corresponding rise in unemployment tipped to be towards 5 per cent by the end of next year, this negative will more than offset another year of strong migration.”
Judo Bank economic adviser Warren Hogan said a broader economic slowdown could drag house prices down by about 10 per cent because of their lofty valuations.
“I think it can be quite a significant downturn when it finally gets triggered by genuine softness in the labour market such as job losses,” Mr Hogan said.
Based on Mr Hogan’s modelling, Sydney is overvalued by 27 per cent, Melbourne by 22 per cent and nationally by 22 per cent.
Tim Lawless, CoreLogic research director agreed that there was a clear risk housing prices could start trending lower again across Sydney, given the sharp slowdown in the monthly rate of growth.
Since peaking in May, the monthly growth for Sydney dwelling values has slowed from 2 per cent to 0.8 per cent in October.
CoreLogic’s daily index shows a further easing in the past four weeks, with Sydney home values rising by just 0.5 per cent.
“One of the primary drivers of growth in Sydney home values has been lack of advertised supply, but stock levels have normalised back to average levels due to a rise in vendor activity through winter and spring alongside a slowdown in purchasing activity over the same period of time,” Mr Lawless said.
“With housing affordability already stretched and getting worse, there is a good chance buyer demand will continue to wane.
“Sydney’s preliminary clearance rate from the weekend at 68.7 per cent was the lowest since mid-February, suggesting a market that is swinging back in favour of buyers as stock levels rise.”
SQM predicts Melbourne and Darwin housing prices to fall by as much as 3 per cent, Hobart’s to slump 7 per cent and Canberra’s to decline 8 per cent.
However, Perth and Brisbane are poised to buck the downtrend and post 9 per cent and 8 per cent gains respectively. Adelaide is expected to post between zero and 3 per cent gain.
In a scenario where the country’s population grows by 500,000 or more, interest rates stays at 5 per cent or lower and the jobless rate is limited to 5.5 per cent, national house prices could rise between 1 per cent and 5 per cent.
On the other hand, house price falls could be deeper if inflation were to accelerate to the point of forcing the Reserve Bank of Australia to lift the cash rate beyond 5 per cent.
In a scenario where interest rates rise above 5 per cent, unemployment rate increases above 6 per cent, inflation surges 7 per cent or higher and population slows to 460,000 or less, house prices across most capital cities except Perth and Brisbane could drop by up to 10 per cent.
“If I am wrong and the housing market has another strong year, it will be because employment growth has continued to be firm and/or migration has once again grown more quickly than expected and homeowners once again have managed to withstand the higher lending rate environment,” Mr Christopher said.
Follow the topics, people and companies that matter to you.
Fetching latest articles
The Daily Habit of Successful People