Sydney and Melbourne house price fall sharpest in five downturns since 1965

Australian Financial Review Mar 18, 2019 3.53pm

Su-Lin Tan

The fall in Sydney real house prices is close to hitting its average downturn decline at only halfway through the average downturn cycle, setting it up for the sharpest drop for the city since 1965, a BIS Oxford Economics study shows.

The average downturn for Sydney house prices is 14 quarters and the average total real price decline each downturn is 21 per cent. The current downturn has progressed through six quarters to December 2018, but real median prices – taking out the effects of inflation – are already down 16 per cent.

This could mean Sydney house prices have either dropped faster than average downturn cycles – five cycles since 1965 were analysed – or it could bode tougher times ahead with more price falls to come, BIS Oxford Economics' Angie Zigomanis said.

"So far, the period of decline in these two markets has been much shorter than the longest downturn duration and around half of their respective average downturn lengths in both the house and unit markets," he said in the report Anatomy of a downturn.

"Therefore it is foreseeable that the current downturn in the Sydney and Melbourne markets may have at least another year to run before reaching the cyclical trough.

"In the context of previous market downturns, prices in the Sydney and Melbourne markets are likely to continue to decline in 2019, particularly given the constrained availability of credit and ongoing weakness in investor demand.

"The resultant reduced turnover and declining prices may lead to a delay in the next round of development."

Tougher times ahead for apartments

He says the likely scenario, however, is a flattening of prices at the end of the year, without an immediate upward recovery.

While the decline in Sydney's real prices is the fastest among capital cities in the current cycle, Perth, on the other hand, has had the biggest price decline in its current cycle, with house and unit prices cooling 18 to 26 per cent between 2013 and 2018.

The Sydney apartment cycle also mirrors its house price cycle, with real prices already down to the average downturn decline of 13 per cent at the halfway mark. Apartments have harder times ahead, however, as record levels of supply put additional pressure on prices, Mr Zigomanis says.

Whether Sydney would re-enact its worst downturn recorded since 1965, the 1980s downturn, which saw 34 per cent price drops over 23 quarters, was yet to be seen. Mr Zigomanis, however, caveated that inflation in the 1980s was a lot higher, causing more volatile price swings whereas lower inflation now could curb deep movements.

Melbourne, while experiencing a more moderate price fall than Sydney, is also having its sharpest downturn since 1965. Real prices have fallen 14 per cent in six quarters compared with the average of 15 per cent over 11 quarters.

There is, however, some upside in Adelaide and Canberra.

In contrast to those of Sydney and Melbourne, Adelaide real prices have grown and that market is not going through a downturn. Its last downturn was between 2010 and 2013.

Canberra's house prices too were flat, due to an undersupply of dwellings.