Capital city prices
In 2018, capital city prices in Sydney and Melbourne fell more than they had in the past 30 years, with slight falls also in Perth. Brisbane and Adelaide recorded slight price rises, while Hobart soared with a 9.7% rise over the year.
In 2019, experts are divided on whether the downward trend will continue to level out.
The causes of the decline are varied. They include tighter regulations around lending following the Banking Royal Commission, restrictions on overseas investment which have historically focused on the eastern capitals, and market sentiment. That adds a layer of uncertainty to the forecast, with several variables to consider.
Most experts agree that we can expect a continuing fall in the first half of 2019 as markets adjust to the conditions. Where the forecasts differ is whether prices will level off and begin to recover in the second half, or continue to drop.
Domain’s experts predict that the low point will be mid-2019, with prices down around 7% to 2016 levels, before growing modestly in the second half and recording a 4% rise in 2020. That view takes into account a belief that the banks will adjust to increased lending restrictions and be able to provide their previous level of service, bolstered by high population growth and greater affordability for first home buyers.
Stephen Koukoulas of Market Economics, in contrast, told the Australian Financial Review that prices would fall another 7-10% in Sydney in 2019. He points to the fact that federal Labor is tipped to win the next election and may introduce tax changes that reduce investor demand.
Head of Elders Home Loans, John Rolfe comments, “In late 2018 we saw APRA relax its prudential measures on lenders in relation to investment lending quotas and then early in the new year they also removed restrictions on interest-only loans. Moody’s rating agency welcomed this move and said that APRA had helped ‘engineer’ a ‘soft landing’ off the back of a prolonged period of growth.”
Either way, it’s important to remember that these predictions focus almost solely on Sydney and Melbourne. Adelaide, Canberra, Brisbane and Perth are all projected to post steady but modest gains of between 2 and 5%. Hobart’s growth is likely to slow down from the wild ride of 2018, but stay in the black at around 2%.
Regional Australia, especially in NSW and Victoria, has been outperforming the capitals since October 2017. This isn’t showing any signs of changing, even with the drop in capital city prices. There are strong trends for families to move out to regional centres around Sydney, Melbourne and Canberra and commute part or full-time.
Particularly high performers in 2018 were Geelong, which recorded a 10% rise in home values, followed by the Southern Highlands/Shoalhaven region with 9.5%, and Newcastle and Lake Macquarie both with 8.3%. Those areas are expected to continue to rise along with other major regional centres, including Queensland’s Gold and Sunshine Coasts, Victoria’s Ballarat, and the Hunter Region surrounding NSW’s Newcastle.
Official interest rates, set at 1.5% by the RBA, haven’t changed since July 2016. That’s a staggeringly long run at historically low rates, and it doesn’t look likely to change any time soon. The RBA has said publicly that they don’t see themselves raising rates in 2019. The fall in house prices and continued stagnation in wage and employment growth means that a rise would risk worsening an already precarious situation.
While chief economist Shane Oliver has said that there is a rate hike ‘pencilled in’ in 2020, he also acknowledges that current market conditions might mean erasing it altogether. And while cutting interest rates is not their base case, they concede that the weakness in the housing sector might make it necessary.
Taken all together, the current forecast offers endless possibilities. With the heat out of the market, home buyers may be able to snag their dream home for the first time, while savvy investors could do worse than look regional. Always get expert advice before making a major financial decision.