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Diverging Property Forecasts

The Australian property market continues to decline, with values falling across the country as the downturn accelerates into new territory. According to figures from the Australian Bureau of Statistics (ABS), property values fell $133.1 billion in the December quarter alone, with average capital city prices down by 2.4 percent. Despite these worrying figures, opinions are very mixed on what will happen next. Will house prices fall by 40 percent in Sydney and Melbourne as predicted by one analyst, or is the market already getting ready to turn?

According to ABS figures from the recent December quarter, Sydney and Melbourne continue to lead the downward trend with 3.7 percent and 2.4 percent falls respectively. Prices in Brisbane were also down for the quarter at -1.1 percent, followed by Perth at -1 percent, Darwin at -0.6 percent, and Canberra at -0.2 percent. Adelaide and Hobart were the only two Australian capitals to record positive growth for the quarter at 0.1 percent and 0.7 percent respectively. Over the year, Sydney lead the decline at -7.8 percent, with Melbourne close behind and Hobart the only capital to record positive annual growth at 9.6 percent.

According to separate data from analytics firm CoreLogic, Sydney and Melbourne prices are now down by 12.3 percent and 8.7 percent from their peaks, which were recorded in July 2017 and November 2017 respectively. Opinions differ widely on how much further prices will slide, with AMP Capital tipping a total peak-to-trough fall of 25 percent for Sydney and Melbourne, and UBS forecasting a 25 percent drop with the possibility of 30 percent. If these two forecasts sound like they're are on the pessimistic end of the spectrum, LF Economics founder Lindsay David has gone even further by predicting a fall of 40 percent for Australia's two biggest markets.

Not everyone is promoting such a pronounced downturn, however, with Ric Deverell and Justin Fabo from Macquarie Bank even making the optimistic suggestion that prices are about to turn. Their reasoning is based on the recent low level of building approvals, with less construction meaning fewer homes and increased housing demand. In order to see a reversal of current market conditions, however, we will need to see more activity and optimism throughout the economy. Strong population growth and immigration numbers may help to slow down the current decline, with rising wages growth and lower interest rates also likely to provide incentives.

Like most things in the real estate market, reality will probably fall somewhere between these two extremes. While the doom and gloom of a 40 percent drop is highly unlikely, the market is probably not ready to bottom out just yet. The housing market is incredibly complex, with the future of property prices dependent on domestic supply and demand, building approvals, interest rates, wages growth, historical technical support, and international economic conditions just to name some of the known variables.

According to BIS Oxford Economics senior manager Angie Zigomanis, property investors are also likely to play an important role on the length and depth of the current decline: "Investors were a key driver of price growth through their upturns and the fall in investor demand is now underpinning the decline in prices... The weakness in prices and likely concerns about further falls will continue to play on purchaser sentiment through 2019, with further price falls in Sydney and Melbourne expected."

Image source: JPL Designs

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