We should expect this to continue in 2018 but at this stage there are no immediate signs of the property bubble bursting and a crash in prices. Other than Perth and Darwin which have both seen sizeable declines in property values over the past year, Sydney and Adelaide are the only cities where residential prices have started to actually decline and this should continue over the next 12 months. In Melbourne, prices have essentially just held steady over the past few months. In the early stages of 2018 Melbourne should join its northern neighbour and prices should start to drift down. The national property market declines will be driven by the falls in Melbourne and Sydney, which will be larger. To the extent housing prices continue to experience a soft landing we should be grateful to the financial regulator, the Australian Prudential Regulation Authority.

It has essentially cleaned up the mess left by the Reserve Bank, which cut interest rates to the bone and it doing so created the preconditions for the massive increased pricing for housing. APRA seems (to date) to have successfully employed ‘macroprudential’ measures, which essentially put checks on bank lending and curb the rate of growth in interest-only loans and investor loans. In response banks started to increase the interest rates for these borrowers, which had to effect of cooling demand. Meanwhile, over the past couple of months, the clearing rate for housing sales has fallen significantly. This suggests seller expectations have not come down to match the market, so many properties are simply not being sold. Real estates agents may not be happy with this trend but it does indicate the property sellers are not especially financially distressed. In other words, they are not forced sellers.

This augurs well for a steady deflation in house prices in 2018. This view is echoed by the group that monitors and collates property prices, CoreLogic. It expects to see a further slowdown in national housing market conditions and continued tightness on credit policies as’ regulators keep a watchful eye out for a rebound in investment credit growth or, a reversal in the trend towards fewer mortgages with a loan to valuation ratio of more than 80 per cent. CoreLogic is also a member of the growing band of experts that don’t see an interest rate coming in 2018. I agree with them but would go one step further and predict that we won’t see interest rates rise for at least the first half of 2019 given there is little prospect for inflation and wages growth in the short term.

(In December’s mid year economic fiscal outlook the government revised down its expectations for wages growth.) Among economists there is little consensus. Financial markets point to a 50/50 chance of a rate rise to 1.75 per cent by the end of next year from the current rate of 1.5 per cent. National Australia Bank economists are looking for two rate rises in 2018 - one in the middle and one towards the end. At the other end of the spectrum, Westpac sees no rate movement in 2018. Shane Oliver from the AMP pitches his expectations somewhere in the middle, and is looking for one rate rise in late 2018.

A last word on this from Deutsche Bank economist Adam Boyton who says, ‘We continue to expect no change in official interest rates in Australia over 2018. That view reflects not just an expectation that inflation is likely to remain low and wages growth stubbornly weak; but also that household incomes and spending will remain under pressure. While the economy is expected to continue its gradual pick up, it will be somewhat constrained until households begin to feel good again.