Is the current property downturn just part of the usual cycle?

Is the current property downturn just part of the usual cycle?

It’s no secret that property values in some areas across Australia are sliding– gently nationwide but more significantly in the country’s two biggest markets, Sydney and Melbourne.

property price

It’s a trend that has seen doomsayers come to the fore, with some suggesting the slide will precede a slump in values of as much as 40 per cent.

So, should homeowners and buyers be concerned? Or is the current decline par for the course in a sector where peaks and troughs have always been the norm?

Tim Lawless, executive research director at property analysis firm CoreLogic thinks it is the latter.

Values in decline

Dwelling values nationwide fell by 2.7 per cent in the 12 months to July 2018, according to CoreLogic’s calculations. In Sydney, the market was down 6.2 per cent over the same period. In Melbourne, values have fallen by 4.4 per cent since their peak in November 2017.

The drops are not surprising, considering the extent of the upswing in the two southern capitals prior to their peaks last year, according to Lawless.

“The trajectory is really nothing unique; it’s mirrored the rates of decline we’ve seen in previous downturns,” he says.

Lawless believes the strength of their local economies, which boast low unemployment and high growth, may have helped cushion the decline in Sydney and Melbourne.

Looking ahead

CoreLogic data predicts values will continue to fall until at least mid-2019.

Housing finance has been harder to obtain following a 2017 clamp-down by the Australian Prudential Regulation Authority (APRA) on investor-only and interest-only loans and debt-to-income ratios. Both measures have contributed to the downturn.

“Interest rates have risen a little, but in the grand scheme of things they’re still exceptionally low,” Lawless says.

“The biggest impact will continue to come from credit availability – borrowers needing more substantial deposits than they did in the past and lenders reducing their exposure to interest-only and investor-only loans.”

The slide is unlikely to become a dramatic slump, Lawless adds, unless significant external forces come into play.

These include a substantial increase in unemployment, a sharp rise in interest rates or an economic shock on the scale of the 2008 Global Financial Crisis.

“It’s most likely we’ll see a managed and controlled downturn like we’ve seen in previous cycles,” Lawless says.

“And if the market does look like it’s about to implode and we see the decline in values becoming substantially more material than expected, there’s potential for interest rates to be lowered, regulations to be wound back and stimulus to be brought to the market, as it was in 2008.”

The silver lining: a better deal for some buyers

Lower dwelling values aren’t all bad; in fact, the reverse is true. For many buyers, the lacklustre market is a gift that’s been a long time coming.

“First home buyers may see a lot of opportunity in this down phase,” Lawless says.

“There’s a lot more stock to choose from and they can negotiate much harder because they won’t have the competition in the marketplace they’ve seen for the last five or 10 years.”

“For people who are serious about buying, they’re in a much better position to find a property that suits their budget and get a good deal on it.”

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