AMP Capital chief economist Shane Oliver said that while he is “not in the property crash camp”, residential property investors “need to be careful” as APRA’s lending curbs begin to cool the hot Sydney and Melbourne property markets, which “have had all the characteristics of a bubble of late (overvaluation, rapid price gains, and a desire to get in for fear of missing out).”
In a market update yesterday, the chief economist wrote that investors should expect property price falls of 5 to 10 per cent around 2017.
“High house prices combined with high household debt-to-income ratios suggest Australia is vulnerable should something threaten the ability of households to service their mortgages,” Mr Oliver said.
“As such the RBA and APRA have been right to try and slow the property market down. Our assessment is that the national property market is cooling.”
The Westpac-MI consumer sentiment survey shows a sharp fall in consumers’ assessment as to whether now is a good time to buy a dwelling, led by NSW. Auction clearance rates have also slowed.
Mr Oliver said Sydney and Melbourne will see a slowdown, with price growth to slow to around five per cent over the year ahead.
“Price growth is likely to remain negative in Perth and Darwin as the mining boom continues to unwind,” he said.
“Hobart and Adelaide are likely to see continued moderate property growth, but Brisbane may start to pick up a bit.
“Nationwide price falls are unlikely until the RBA starts to raise interest rates and this is unlikely before 2017. And then in the absence of a recession or rapid interest rate hikes, price falls are more likely to be 5 to 10 per cent as was seen in the 2009 and 2011 down cycles than anything worse."
Mr Oliver said the cooling in investor demand in Sydney and Melbourne are likely to provide greater flexibility for the RBA to cut interest rates again.
While over the very long term Australian residential property will provide similar returns as Australian shares, over the medium term real estate looks far less attractive, he said.
“It is now expensive on all metrics and offers very low income (rental) yields compared to all other assets except bank deposits and government bonds.
“The gross rental yield on housing is around 2.8 per cent (after costs this is around 1 per cent), compared to yields of 6 per cent on franking credits). This means that a housing investor is more dependent on capital growth to generate a decent return.”
Mr Oliver’s comments follow Monday’s forecast from Macquarie that house prices will start to fall by 7.5 per cent from peak to trough from as early as March next year.
Credit Suisse and Bank of America Merill Lynch shared similar outlooks for Australian property, pointing to high levels of household debt and the potential for an oversupply of housing as population growth slows.
According to the 2015 Demographia Housing Affordability Survey the median multiple of house prices to household income is 6.4 times in Australia versus 3.6 in the US and 4.7 in the UK.
Mr Oliver noted that on the basis of the ratio of house prices to rents, adjusted for inflation relative to its long-term average, Australian houses are 37 per cent overvalued and units are 14 per cent overvalued.
Mortgage Choice CEO John Flavell rejected the negative outlooks of Macquarie and Credit Suisse.
“While Macquarie and Credit Suisse have voiced their concern over the stability of the property market, the fundamental laws of supply and demand dictate that the property prices in Sydney and Melbourne are unlikely to change any time soon,” Mr Flavell said.
"In Australia, we have a modest rate of population growth driving modest increases in property demand. We have had historically low levels of new construction keeping supply tight especially in Sydney and Melbourne.
“We continue to see high rates of urbanisation, particularly in NSW and Victoria, as our population is attracted and retained by our largest cities given the employment opportunities and amenities they provide.
“Recent infrastructure investment in Sydney and Melbourne has been almost exclusively on roads with an acute lack of public transport linkages, driving our population further into city centres.”
To believe that the property market will decline steeply, or indeed cause a recession, is to believe that the basic rules of supply and demand are absent from the Sydney and Melbourne property markets, Mr Flavell said.