With Banks wary, Buyers jittery and Investors pulling-out, the Australian real-estate sector has all ingredients in place for the slump to continue. And, it has been the hottest topic of discussion for the last few weeks. About a month ago, Shane Oliver (Head of Inv Strategy & Chief Economist at AMP Capital) - one of Australia’s most high-profile economists had stated that Real-estate prices in Sydney and Melbourne appeared to be on-track for an anticipated decline of 20% and it won’t be surprising to witness a crash according to a significant rethink on the direction of the market.
His previous estimation of a 15% drop from the peak that was likely to play out to 2020 was updated based on data in recent weeks. And, the warning came against a backdrop of an increasingly gloomy outlook for house prices that have been falling consistently in the two big cities during the last 12 months. They have slipped almost 5% in the past year, implying they could now have another 15% to go.
At the same time Oliver had also warned that the risk of a crash could not be ignored backed by the fact that banks may overreact and become too tight and investors may decide to exit in the event of falling returns, low yields and possible changes to negative gearing
and capital gains tax and all of that appears true now.
According to a recent report, Sydney house prices fell 6.5% over the year while in Melbourne, houses declined by 3.2%. But in Brisbane, house prices actually grew by 2.2% over the year. Over the last five years, prices headed north across the country, thanks to the low interest rates that encouraged investors and households to take on more debt. But now, the tightening of credit by the banks following regulatory intervention and the interim royal commission report, rising mortgage rates, tighter credit conditions and reduced borrowing power, have seen the house prices take a plunge.
According to that report, average house prices in Melbourne and Sydney are forecast to fall 2.5% (Unit value by 2.1%) and 1.2%(Unit value by 3.1% ) respectively by June 2021. However, houses in all other capital cities are forecast to increase with the strongest growth expected in Adelaide and Brisbane, which are tipped to climb 12.4 and 11.3% respectively.
While the first-home buyers may welcome the plunge in prices as an opportunity to realize the dream of owning a home, the past two months have seen a considerable drop in loans to owner-occupiers, suggesting that people are happy to stay on the side-lines until the market has stabilized. In parallel, it has also got much difficult to get a loan as the major banks have tightened lending criteria and introduced stricter expense verification, lengthening the time that it takes to get approval and reducing the maximum amount that can be borrowed.
The weakening property market also had a direct impact on property listings businesses with Domain Holdings Australia Ltd (ASX: DHG), owner of domain.com.au, down 35% during the last 3 months while REA Group (ASX: REA), owner of realestate.com.au, shedding 20%. Going by the market trends, it appears that the storm in the real-estate sector is yet to settle down and it would be wise to wait for the market to stabilize before putting your plans into action.
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