Sydney property prices took their largest ever quarterly fall at the end of 2015. That record was only 3.1% down, which compared to the huge falls taken in the US and Europe in 2008/09 is insignificant, but for a country with the world’s best performing residential housing market, it hurts
For those that have been watching FIIG’s Smart Income Investment Strategy presentations or webinars, these views are all consistent with “Risk #3: Housing Market Downturn” in which we suggest being short the AUD, going long on interest rates, and reducing Australian equities (in favour of offshore equities and/or corporate bonds). For the braver investor with expertise in property markets or access to good research, of course such a correction also means watching for oversold property, equities or bonds from the property sector.
There’s plenty of news and commentary around on this topic. They typically fall into two camps: the real estate industry, including Domain.com and mortgage providers, telling us there is nothing to worry about, and a range of us from investment sectors but not residential property. Accepting that the industry commentators like Domain have to be positive to keep selling, here’s a summary of the key points from more independent commentators:
- A 3.1% drop is tiny compared to the “crashes” in the US and Europe, but some suburbs will be hit much harder (FIIG)
In 2012, the median price in Sydney fell 5%, but some suburbs like Woollahra, Strathfield, Canada Bay, Mosman, Neutral Bay or Palm Beach dropped as much as 28%. Sydney is not one uniform housing market. Suburbs with more vacant land, more unit development, more new housing will be hit harder. And suburbs with extreme growth at the top end, such as parts of the eastern suburbs and waterfront suburbs such as Mosman, will likely be worst impacted. - Oversupply in units became an issue in Brisbane and Melbourne in 2015, will be an issue in Sydney in 2016, and housing oversupply overall in Australia by 2018 (BIS Shrapnel)
- Supply driving down prices in Sydney (Philip Lowe, RBA Deputy Governor), with particular pain felt in new housing suburbs (outer suburbs) and in units
- Macquarie expects housing in Sydney to fall in March quarter 2016 until the middle of 2017, falling around 7.5% in total
- AMP’s Shane Oliver has a similar albeit vaguer view: “5-10% fall by 2017”, but qualifies that by saying “so long as there isn’t a recession”.
- Because so much more of the housing stock is held by investors than any time before in Australia’s history, prices could fall harder in a downturn (Saul Eslake, freelance economist, formerly with Merrill Lynch)
For investors, the implications are that banking stock earnings will come under pressure with less mortgages written or even increased bad debts. More broadly, declining housing prices generally make conditions more favourable for the RBA to leave rates on hold or reduce as they are less worried about housing market bubbles being caused by low rates.
If housing prices continue to drop in 2016, longer term interest rates in Australia are likely to be come under downward pressure.