Rising prospect that the RBA will cut before hiking: Shane Oliver

Rising prospect that the RBA will cut before hiking: Shane Oliver
Rising prospect that the RBA will cut before hiking: Shane Oliver


Australian capital city dwelling prices fell another 0.9% in November marking 14 months of consecutive price declines since prices peaked in September last year.

This has left prices down 5.3% from a year ago, their weakest since the GFC.

The decline is continuing to be led by Sydney and Melbourne.

Sydney dwelling prices fell another 1.4% and they have now fallen 9.5% from their July 2017 high, Melbourne prices fell another 1.0% and are down 5.8% from their November 2017 high.

Perth also saw prices fall by 0.7%, but Hobart and Darwin saw prices rise by 0.7%, prices in Canberra rose 0.6% and Brisbane and Adelaide prices rose 0.1%.

As can be seen in the next chart – just as the boom was concentrated in Sydney and Melbourne over the period from 2013 to 2017, so too is the bust.  

Source: CoreLogic, AMP Capital

The decline in property prices is being driven by a perfect storm of tighter credit conditions, poor affordability, rising unit supply, reduced foreign demand, the switch from interest only to principle and interest mortgages for a significant number of borrowers, fears that negative gearing and capital gains tax concessions will be made less favourable if there is a change of government, falling price growth expectations and FOMO (fear of missing out) risking turning into FONGO (fear of not getting out) for investors.

These drags are most evident in Sydney and Melbourne because they saw the strongest gains into last year and had become more speculative with a greater involvement by investors.

Ongoing weakness in these two cities is evident in very weak auction clearance rates and auction sales volumes.

Recent auction clearance rates averaging just below 40% in Sydney and Melbourne are consistent with ongoing price declines of around 7 to 10% pa.

Source: Domain, CoreLogic, AMP Capital

Source: CoreLogic, AMP Capital

The decline in Sydney and Melbourne property prices likely has much further to go as these considerations continue to impact particularly as Comprehensive Credit Reporting kicks in making it even harder to get multiple mortgages and if changes to negative gearing and capital gains tax become reality after a change of government at the coming Federal election.

In these cities we expect to see a top to bottom fall in prices of around 20% spread out to 2020.

However, the plunge in clearance rates and the uncertainty around credit tightening and tax concessions indicate that the risks are on the downside.  

Source: CoreLogic, AMP Capital

Having not had the same speculative boom over the last five or six years other capital cities are likely to perform better.

Perth and Darwin are likely close to the bottom as the mining investment slump comes to an end (in fact Darwin may already be there albeit its taking longer in Perth than I have been expecting!), Adelaide, Brisbane, Canberra and Hobart are likely to see moderate growth.

Similarly home prices in regional centres are likely to hold up better with modest growth as they haven’t had the same boom as Sydney and Melbourne and offer much better value and much higher rental yields.

The average gross rental yield for regional areas is 5% compared to just 3.6% in the capital cities.

Overall, Sydney and Melbourne are likely to see a top to bottom fall of around 20% spread out to 2020, but for national average prices the top to bottom fall is likely to be around 10%.

A crash landing – say a national average price fall in excess of 20% - remains unlikely in the absence of much higher interest rates or unemployment, but it’s a significant risk given the difficulty in gauging how severe the tightening in bank lending standards in the face of the Royal Commission will get and how investors will respond as their capital growth expectations collapse at a time when net rental yields are around 1-2%.

Implications for interest rates

Ongoing home price falls in Sydney and Melbourne will depress consumer spending as the wealth effect goes in reverse and so homeowners will be less inclined to allow their savings rate to decline.

It’s also a negative for banks.

It’s consistent with our base case view that the RBA will leave rates on hold out to late 2020 at least.

However, home price weakness is at levels where the RBA started cutting rates in 2008 and 2011 and the 2015-16 property slowdown was also turned around by rate cuts in May and August 2016.

So with prices continuing to slide there is a high and rising risk that the next move in official interest rates will be a cut rather than a hike – but at this point the RBA is a long way from contemplating a rate cut as it would need to see evidence that the slump in home prices and the drag on consumer spending is seriously threatening to push inflation even lower - so it’s probably a second half 2019 story at the earliest.

SHANE OLIVER is Head of Investment Strategy and Chief Economist at AMP Capital 

Rba Rate Decision Dwelling Prices