Mass property sales could trigger market crash, says economist

Speaking to Mortgage Business, AMP Capital chief economist Shane Oliver said that while recent price declines in Australia’s housing market are “modest”, investors could be spooked into selling their properties in tandem with other nervous investors if prices continue to fall, potentially triggering a housing market crash.

The AMP economist described the would-be snowball effect as “reverse FOMO” (fear of missing out), making reference to the sharp influx of property investors who sought to take advantage of the booming housing market over the past few years.

Mr Oliver noted that a decline in rental yields and the expectation of lower returns on equity could prompt investors to re-examine their property portfolios.

“People were once filing in for fear of missing out, but it may work in reverse where people start selling in fear of a [sharper] fall in prices,” the chief economist said.

“That could resort in a sharper decline in prices, but I don’t think we’ve seen much of that at the moment.”

Mr Oliver also told Mortgage Business that he expects “several years of decline” in home values ahead, particularly in Sydney and Melbourne.

The economist predicts a price decline of up to 15 per cent in response to significant price growth over the past decade, which he claimed was “definitely not sustainable”.

“I’m of the view that, based on my own projections, we’ll see several years of decline,” the chief economist continued.

“I’m expecting Sydney and Melbourne property prices to have a top-to-bottom fall of about 15 per cent, of which we’ve only done about 2–4 per cent so far, so we’ve still got more downside to go and I suspect that will be spread out over the next couple of years.”

Mr Oliver’s projection is in line with recent ANZ research which forecasted falls of 10 per cent.

CoreLogic’s research analyst, Cameron Kusher, also recently claimed that “it seems unlikely the returns of the past decade will be replicated in the next 10 years”.

However, Mr Oliver warned observers not to view Australia’s housing market as “one market”, noting that much of the recent price reversal has been confined to Sydney and Melbourne.

“We used to say that we live in a two-speed economy or a multi-speed economy, and we’ve still got that with respect to housing,” Mr Oliver added.

“Up until the mining boom, we had surging property prices in Darwin and Perth, weaker property prices in Sydney and Melbourne, and that’s now gone in reverse.

“Now it looks like it’s starting to reverse again, so it’s dangerous to talk about the Australian property market as one market; it’s certainly not.

“It’s a good thing in a way, because it means Sydney and Melbourne go down, other parts of Australia might start going up again, so it can provide a bit of an offset [for the broader economy].”

Further, Mr Oliver said that while the “environment has well and truly changed as boom-time conditions have faded”, he does not foresee a sharp downturn unless “unemployment surges or interest rates rise a lot higher”.

Commenting on recent out-of-cycle interest rate hikes from several non-major banks, Mr Oliver said: “I suspect that it’s highly likely the major banks will follow suit as well.

“The major banks have a bit of flexibility because they get more of their funding from depositors than the smaller banks would, and certainly a lot more than the non-bank lenders do.”

However, Mr Oliver observed that recent rises from non-majors are slight in comparison to an official cash rate hike from the Reserve Bank, and he said that he expects such rate changes to influence the central bank’s decision to keep the cash rate on hold.

“What we’re seeing at the moment is modest in the grand scheme of things compared to what the Reserve Bank might do,” the chief economist added.

“I think it’s also likely that the Reserve Bank will keep interest rates on hold because the banks are increasing their rates for them.”

[Related: Housing price growth ‘unlikely to be replicated’ soon]