Will Australian House Prices Drop?

Will Australian House Prices Drop?

Everybody wants to know whether Australian house prices will drop.

Whether you’re a home owner or a renter or both (in which case you’re a ‘rentvester’ ) – I’m betting that you’re interested in the answer to this question too.

Trouble is you see – there is no crystal ball to give you a definitive answer. That doesn’t mean though that you shouldn’t be interested in the possibilities being thrown around.

There is a lot of research and commentary from prominent economists, that suggests there is likely to be some price relief on the horizon, with a slowdown in price growth predicted for later this year and into next year.

Either way, the general consensus seems to be that the continued run up in prices is over – the argument now rests over whether there will be a ‘crash’ or a ‘correction’.

A correction defined broadly speaking as price drops of between 10 – 15% whereas a crash would likely mean prices falling by 20% or more.

Property is a hot topic and this debate is unlikely to go away anytime soon.

Here is a summary of the arguments being had between economists and property commentators alike for both sides of the current debate: “Will there be a crash or a correction.”

Arguments for there is likely to be a ‘crash’ 

High levels of Household Debt

Levels of household debt are now the highest in the world around 189% of incomes and more than 123% of GDP.

This makes households very vulnerable to rises in interest rates, ongoing access to credit for refinancing purposes, increases in cost of living or unemployment.

Worsening Affordability metrics

According to the 2017 Demographia Housing Affordability Survey, the median house price in Sydney will set you back 2 times the median salary compared with 3.9 times in the US and 4.5 times in the UK.

Steve Keen, economist and author says that this will eventually trigger a fall in prices as nobody who wants to live in a house can afford to buy one anymore. He makes his point here.

According to the UBS Global Real Estate Bubble Index, Sydney now ranks third among cities at most danger of developing a housing bubble making it by their definition one of the riskiest property markets in the world.

Tightening of Credit

Mortgage lenders have clamped down on property investors to comply with new Australian Prudential Regulation Authority [APRA] requirements that investor-loan growth remains below 10%.

This has led to both a tightening of lending criteria for investors as well as interest rate increases for both investors and owner occupiers.

New regulatory guidelines from APRA for banks to cover the risks of their mortgage lending has meant bank capital requirements have increased by 50%. This adds to their funding costs which is ultimately passed on to borrowers with higher interest rates.

Interest rate rises for interest only loans have started this year with ANZ, Bank West, NAB, Commonwealth and more recently AMP all raising rates on investor loans in 2017 so far.

These increases are set to continue as banks encourage borrowers to move from interest only to principal and interest loans in order to comply with APRA’s new guidelines on investment lending at this stage of the property cycle.

Interest Rate Movements

Expected rise to the cash rate from the RBA back to a ‘neutral’ cash rate of approximately 3.5%.

Former RBA board member John Edwards says rates could rise as much as eight times in the next two years given economic growth globally and domestically is on the rise so the rationale for super low cash rates is no longer logical.

This would mean an adjustment upwards of adjustable retail mortgage rates putting pressure on already highly leveraged households.

Unemployment Risks

There is a risk of unemployment rising as consumer spending falls due to the extremely high levels of household debt (now 190% of income).

Current RBA figures suggest that the unemployment rate is 5.9% of the population.

Here’s a scary thought – today the mining industry accounts for just 6% of employment, compared to the services industry which makes up 59% of all jobs.

When you consider the mining industry made up such a large part of our economy just five years ago, any changes to the services industry could have a catastrophic effect on employment which has a flow on affect to mortgage serviceability etc.

Housing Supply Factors

Supply is increasing. A boom in housing construction may lead to oversupply. There will be 720,000 new homes built across the country by 2019. Half of these will be in Sydney and Melbourne alone.

As a result, Goldman Sachs research expects this to translate to an excess of 75,000 dwellings by the end 2017 rather than a forecasted shortfall of 140,000.

Falling Foreign Investor Demand

A fall in foreign investment demand. Chinese authorities are cracking down capital outflows leaving the country, including those being funnelled to Australia to pay for property investment.

The updated FX rules introduced by China’s State Administration of Foreign Exchange (SAFE) at the start of 2017, stress that people cannot purchase FX for overseas investment, including buying houses, securities or investment type insurance.

The result is that many property deals are (or at risk of) falling over as Chinese buyers are unable to finalise finance for the purchase.

More recent data from the Foreign Investment Review Board [FIRB] shows foreign approval rates reached their peak in 2015/2016 financial year with 40,000 dwellings approved for purchase by overseas investors.

This has fallen to 15,000 in the most recent 2016/2017 financial year which is a 60% drop. Quite significant.

Arguments for there is NOT LIKELY to be a ‘crash’

The argument of most on this side of the fence is that there is likely to be a ‘correction’ not a crash.

Our population is growing

Population growth appears to be increasing. Latest Census data showed Australia’s annual population growth rate was 1.55% in 2016 – the fastest growth in almost three years.

 There is not a single property market

Australia is not one property market. Each of our capital cities have their own cycles and segments that perform differently.

Factors affecting the performance of one segment may have no effect on another. Uniformity of price movements across all markets is unrealistic (e.g. not all markets move in the same direction all at once).

Market conditions are still good

Market conditions typically preceding a crash in house prices are not evident in Australia.

Factors like rising interest rates, a severe tightening in credit conditions, bank failure, a sharp increase in unemployment or severe overbuilding that creates an oversupply are not threatening our market at present.

Auction Clearance Rates remain strong

Auction clearance rates were 8% across Australia’s capital cities for the last week of July 2017.

This is up from the same time last year where they were 67.9% according to the most widely cited property pricer CoreLogic’s statistics.

Stable employment growth forecasts

Employment growth will hold up demand in our largest capital cities reducing the likelihood of mortgage distress that could lead to forced sales and an oversupply.

(However, as highly indebted households cut back on spending, reducing overall consumption – this may put upward pressure on unemployment rates as businesses struggle financially).

Housing Under supply Issues

This issue is debated hotly between different commentators.

HSBC bank published research last month that found the housing market in NSW is likely to remain under-supplied for some time yet despite the recent boom in residential construction, although many are suggesting that we are coming into a period of record supply / building completions.

It depends whom you ask on this one.

A strong economy

A healthy economy that will continue to perform at a level that is envied by of much of the Western world and will create jobs for anyone who wants one.

A strong banking system

A sound banking system with low interest rates for the foreseeable future, tight lending practices and low default rate.

Foreign Investment has little impact

The argument here is that foreign investment is not driving up prices as determined by the federal government’s parliamentary inquiry. Therefore any drop in demand should not negatively impact upon house prices.

The inquiry highlighted that overseas buyers actually help to make housing more affordable because their investment boosts the economy, provides jobs and — crucially — encourages new homes to be built, increasing housing supply.


It’s worth noting that this isn’t an exhaustive list of arguments – just a summary of the most widely discussed in relation to Australian property prices and where they are headed.

There are a number of overseas market conditions which many argue could impact Australian property prices which I have not discussed here.

Will Australian house prices drop?

This is a complicated argument with many, many factors at play. Which makes determining which way the cookie will crumble all that more difficult to predict.

What will be will be – BUT the smart ones will make sure they are prepared for the ride which ever way it goes.

Rebecca xx


2017-08-06T05:09:21+00:00August 6th, 2017|

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