Economist highlights stark flip in market ‘psychology’

Speaking to Mortgage Business, AMP senior economist Shane Oliver noted the stark shift in market “psychology” off the back of tighter credit conditions and falling property prices, particularly in Australia’s two largest capital cities.

“In Sydney and Melbourne, we’re looking for a top to bottom fall of 20 per cent in property prices,” Mr Oliver said.

“We’re about halfway there in Sydney and not quite halfway there in Melbourne.

“This has been driven by the combination of tighter credit, slowed foreign demand and the change in investor psychology.”

Mr Oliver added that the shift in market sentiment could be “exacerbated” by changes to negative gearing and capital gains tax (CGT) proposed by the federal Labor opposition.  

“The psychology has gone from ‘we better get in now otherwise we’ll miss out and prices will keep going up forever’ to now one of a lot more caution that prices could fall further form the year, and this could be exacerbated by changes to negative gearing and capital gains tax. 

The AMP economist said that while in the past, downward trends in market sentiment were reversed by a reduction in interest rates, a cut by the Reserve Bank of Australia is unlikely any time soon.

“Historically, to get it to turn around, you needed lower interest rates, and it’s hard to see the Reserve Bank cutting interest rates soon,” he added.

“I think they probably will in the second half of next year, but that’s a fair way off yet.”

However, Mr Oliver said that he believes the RBA has revised its outlook to reflect the continued lull in sentiment in the credit and housing space.

“The RBA has obviously gotten a lot more concerned about the tightening in lending standards and doesn’t want to see the banks go from too easy, which was where they were a few years ago, to now being too tight,” he said.

“Just as it took a while to change the banks’ psychology from too easy to too tight, it’ll take a while to change their psychology back the other way again.” 

He concluded: “I think there’s more downside here, and the Reserve Bank is right to be concerned.”

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