Leading market commentator and fund manager Christopher Joye says property prices will drop by up to 25 per cent as falling returns force the banks to lift mortgage rates.
Speaking on the Smart Property Investment Show podcast earlier this month, Mr Joye explained that house prices across Australia fell by approximately 6.5 per cent, peak to trough from November 2010 until May 2012.
“For the best part of almost two years’ prices were declining. In 2011 and 2012 the market was really weak and you could pick up amazing bargains. I think we are going to see a repeat of that cycle,” he said.
“There is no doubt in my mind that prices are going to fall. They are going to fall significantly. We will all be fine, no banks will go bust, but we are looking, realistically, at between a 12.5 and 25 per cent drop in house prices over a period of time across the board, but mainly in Sydney and Melbourne.”
Mr Joye explained that the banks will face increasing pressure to increase home loan rates irrespective of whether or not the RBA lifts the cash rate due to shrinking returns.
In addition, the regulator is forcing them to hold more capital and reduce leverage.
“The four major banks basically have the equivalent of 5 per cent equity deposit on their balance sheets and have 95 per cent debt. So they are leveraged 20 times,” Mr Joye said.
“The same ideas as if you put a 5 per cent deposit down when buying a home and used a 95 per cent LVR loan.
“As they are being forced to use more equity and less debt, their returns are falling and they are going to further increase home loans rates – both investor and owner occupied – over the next two years. That inevitable.”