20% housing downturn unlikely, but spooked investors could upset markets

By Stephanie Aikins

December 07 2018
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The drop in the housing market is unlikely to reach 20 per cent, however spooked investors could prolong the length of the downturn.

Speaking at a luncheon this week, Robert Mellor, managing director of BIS Economics, says median house prices are unlikely to drop lower than 15 per cent in Sydney and Melbourne, with a fall beyond that degree unprecedented.

“In terms of house prices, if we say prices are down by about 8 per cent in Sydney to date, worse-case scenario we’re saying probably another 4 [per cent]. We could say it was 6 or 7, but you’re not really going above 15.”

“This is a relatively large correction. [But] 12 per cent would be our forecast, from the peak of June last year.”

“The biggest price declines of 10 to 15 per cent in the past have always been at the upper end of the market. Median prices have rarely come down more than 10 per cent.”

Investor sentiment flagged as the biggest threat

He says the biggest threat, however, comes from the impact of such drops on investor sentiment. With prospective buyers spooked out of the market, he says, the current downturn could be prolonged.

“If you start talking about annualised figures of 7 or 8 per cent, someone sitting there and making a decision, as an investor or even as an owner-occupier, you’d sit on your hands because there is the feeling of, ‘Well, how much further is this going to fall?’”

Fundamentals are still strong

Mr Mellor highlighted that although the fundamentals in Sydney and Melbourne have not reached oversupply, and demand is predicted to continue, it is the scope of negative investor sentiment that will see key market indicators such as land prices continue to fall.

“You sort of think, Sydney or Melbourne shouldn’t be that bad because the fundamentals of oversupply are not there. Neither of those markets are going to end up in oversupply – maybe pockets of apartments but not generally – and the correction is underway from construction,” he said.

“I think given the magnitude of the downturn in investor demand across the board, you’ll see an impact on detached housing and the sale of land.”

He predicted land prices in some areas of the two capital cities could be down 30 to 40 per cent.

He says that despite his belief that the housing market should improve in both detached housing and land sales by 2021, as the underlying demand from overseas immigration continues to strengthen, investor sentiment will still be a significant headwind.

“I think the big issue will be sentiment still being negative in the investor market in 2021.”

Investors negative sentiment well-founded

He says this negative perception is not unfounded, as investors have been facing increasing housing unaffordability and significant regulatory changes.

“I think the price movements were just so phenomenal. Melbourne is a classic example of where, last year, land prices went up by – I think, the figure is 30 per cent plus in a year. That’s just crazy sort of stuff – but, effectively, you get to a point where people can’t afford it.”

Mr Mellor cites Brisbane’s detached housing market as an example of where the fundamentals of oversupply are not a threat, but the investor interest has been curbed by the increased regulatory environment spurred by APRA and the royal commission.

Labor's negative gearing and CGT further headwinds

In light of this, he pinpoints Labor’s proposed changes to negative gearing and the capital gains tax (CGT) as potentially further exacerbating the problem, as investors are already lacking incentives to enter the market.

“The big issue will be investors are not going to return to this market quickly, and that’s before they know that there’s any definite change of policy on negative gearing,” he said.

“The market needs new people in the market, and even though the Labor policy is allowing the continued allowance on negative gearing on new dwellings, the reality is 70 per cent of investors are buying established property, at least.”

“If you haven’t got the dynamics of the market working for established property, the demand for new dwellings won’t happen.

“There’s no point getting a few new investors out there buying off the plan. If the overall sentiment towards the market is negative, the developer won’t get his project off the ground.”

“I think that’s the environment that’s going to be operating still in two years time, and it’s going to take some time into 2021 before that sentiment changes.”

Investors imperative to market improvement

Frank Gelber, chief economist at BIS Economics, agreed, highlighting the risk of increased regulation, as investor sentiment is fundamental in driving median house prices, which greatly impacts the rise and fall of the market.

“The structural difference is that now investors won’t come back,” he said.

“Last downturn in Sydney took nine years, and we were sitting there saying, ‘The market is undersupplied. We need to build more, but prices are below development costs.’

“You couldn’t build anything until we saw price rises, and it was Chinese investors that drove that upswing, and then we all joined in.”

“Now, until median house prices moved, there was no way the market was going to take off.”

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