Normal text size Larger text size Very large text size To some it's a bloodbath in the making. Others see it as a simple correction. But all agree Australia's property boom is well and truly over. Every day there are Melbourne and Sydney property owners who put houses and units up for sale in the hope they can quickly find a buyer and the dream of the new owner offering a high price. But in a sign of the downturn in both markets, more than 8000 of those who entered the market in March of last year are still waiting. Even though the number of new properties being put on the market has dropped by 18 per cent in Melbourne and by 22 per cent in Sydney, the "for sale" signs on front lawns are multiplying. CoreLogic data shows house prices have fallen by 10.3 per cent across Sydney's federal electorates since then, with Melbourne not far behind at 7.4 per cent. That follows rises of up to 75 per cent between 2011 and the middle of 2017. A Sun-Herald and Sunday Age panel of eight economists predicts more falls - an 8.7 per cent decline this year in Sydney and a 9.7 per cent drop in Melbourne. One of the bleakest forecasts comes from LF Economics, which believes Sydney prices could fall by 15 per cent this year alone, while in Melbourne the damage could be 20 per cent. That’s on top of the nominal 15 per cent drop in Sydney and the 12 per cent decline in Melbourne since those markets turned in 2017.


LF Economics principal Lindsay David says there is a real chance of a property "bloodbath" as a string of factors, from the reset of $120 billion worth of interest-only loans to the fallout from the banking royal commission, combine to deliver a housing and economic shock. "While there are some benefits to falling prices, such as more affordable housing, it is important to note the long-term pain the broader economy will experience if the continuing downturn in house prices are not halted," he notes. "The recession of the early 1990s was known as the 'recession we had to have'. We fear, by the end of this year, we could enter the 'recession that really hurts'." For sale signs are multiplying. Credit:Arsineh Houspian It sets up a federal election in the midst of the sharpest property downturn since Malcolm Fraser was prime minister. Treasurer Josh Frydenberg and the man who wants his job, Labor's Chris Bowen, are alert to the risks. "People are concerned about the impact of lower prices in the future on the real economy, and particularly that spillover into household consumption and into the ability of small business to grow and expand and invest," Frydenberg tells the Sunday Age and Sun-Herald in an interview in his Parliament House office.


"Given many small businesses borrow against the value of their family home in order to invest in their business, if their family home is worth less, their ability to borrow could be more constrained and it could also lead to the banks becoming a bit concerned about their lending exposure as well." He believes a Labor government would make the situation worse. "I’m worried that if the Labor Party get their chance to abolish negative gearing as we know it and increase capital gains tax by 50 per cent then that will drive housing prices down with a spillover into the real economy and household consumption," he says. Bowen has no time for that argument: "Give me a break. Shrill, ridiculous, scaremongering," the shadow treasurer says from his office in the Sydney electorate of McMahon, a seat that has seen prices fall by 9 per cent since February last year. The man who could become treasurer by May is scathing of the government's failure to model the impact of its decision to restrict investor lending on the market - one of the primary drivers of the market's fall since 2017. "The interesting thing about the Australian Prudential Regulation Authority's intervention is that nobody modelled it," he says. "I have no issue with APRA, I think they were forced to do the heavy lifting because the government refused to do anything about negative gearing." He says with price falls now in the double-digits the government can no longer describe its intervention as a "scalpel not a sledgehammer".


"They don't say that anymore. They can't," he says. "It is very, very, very difficult for Josh Frydenberg to run scare campaigns on house prices falling, while house prices are falling while he is Treasurer." Loading As the politicians take aim at each other, the Reserve Bank of Australia has gone out of its way to talk about a "correction" in prices that won't derail the overall economy. Industry Super Australia chief economist Stephen Anthony predicted in January that Sydney prices would fall by 14.5 per cent in 2018-19 and by 9.7 per cent in Melbourne. He now believes by the end of 2019, Sydney's prices will have slipped 11 per cent and be down 13 per cent in Melbourne. AMP Capital chief economist Shane Oliver suggests both cities will see values fall by 12.5 per cent this year. Oliver, one of the first major economists to predict the RBA will this year cut interest rates to offset the fallout from falling house prices, says the current downturn was directly related to the surge in prices. "We had a price boom that fed on itself and now we’ve got a price correction that is also feeding on itself," he says.


Oliver expects total prices to fall by 25 per cent in both Sydney and Melbourne, from the top of the market to its bottom, which he tips will be around the middle of next year. That suggests another 10 to 15 per cent in falls over the coming 18 months. Unlike the RBA, Oliver believes the price falls will hurt the economy. He says households will start to increase their savings to offset the drop in wealth held in their properties, clipping around 2 percentage points from growth. "We had the run up in housing construction that helped offset the impact of the end of the mining boom. This time it’s a lot more difficult to see what’s going to fill that hole," he says. "The Reserve Bank thinks it’s going to be government infrastructure and non-mining investment." Another pessimist about prices in the short to medium term is UBS economist George Tharenou. Like Oliver, he expects the RBA to cut official interest rates to counteract the negative effect of so many homeowners seeing the value of their single largest investment diminish. According to Tharenou, a top to bottom fall in national prices of 14 per cent is on the cards. That would be double what has already occurred, with most of the pain in Sydney and Melbourne where prices are tipped to ease by 20 per cent.

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