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In the space of just 12 months, Australia’s housing market has been turned on its head.

Auction clearance rates are falling, property listings are increasing and lending to investors is falling, contributing to recent price declines.

The Commonwealth Bank, Australia’s largest home loan lender, is forecasting further price declines over the 18 months, led by Sydney and Melbourne.

In the space of just 12 months, Australia’s housing market has been turned on its head.

Auction clearance rates have hit the lowest level in years, especially in Sydney and Melbourne, and home loan lending is also slowing, largely reflecting tighter lending standards for investors.

Total property listings are also increasing, and often sitting on the market for longer than in previous years. Sentiment toward housing has also deteriorated, reflecting the recent slowdown.

Given those trends, it’s little surprise that home prices are now also falling, led by Sydney and Melbourne, those markets that outperformed the national average by some margin in recent years.

The Commonwealth Bank, Australia’s largest home loan lender, doesn’t expect much will change over the next 18 months, predicting that the cyclical downturn has some way to go yet.

“The recent evidence suggests that Australia’s latest residential property short-run cycle has come to an end,” says Gareth Aird, Senior Economist at CBA.

“After a little over five years of incredibly strong property price growth, driven by Sydney and Melbourne, dwelling prices have been deflating.”

According to CoreLogic, Dwelling prices in Australia’s eight capital cities fell 0.3% last month in average weighted terms, the sixth monthly fall in a row.

That saw annual price growth turn negative for the first time since 2012.

Aird says the national decline largely reflects price weakness in Australia’s largest and most expensive markets, Sydney and Melbourne.

“Dwelling prices in Sydney have fallen for eight consecutive months, and are down 4.3% from their peak in mid-2017,” he says.

“Prices have fallen for five consecutive months in Melbourne.”

CBA

In his opinion, Aird says the same trends that led to recent reversal will likely continue in the period ahead.

“It is our view that prices will to continue to deflate over the next 18 months,” he says.

“Credit standards are likely to be further tightened, supply will continue to lift, mortgage rates are more likely to go up than down and buyer expectations have adjusted downwards from exuberance to more rational levels.

“We believe there is enough evidence to suggest that property prices are likely to head lower, particularly in Sydney and Melbourne.”

And he expects the declines will continue to be led by weakness in Sydney and Melbourne.

“Our base case for property prices has them down by 3-6% per annum in Sydney and Melbourne by end 2018,” says Aird.

“That would take the fall in Sydney prices from its July 2017 peak to around 7½%. For Melbourne, prices would be down by around 5% from their November 2017 peak.

“Some further dwelling price deflation looks probable in 2019 and we see the peak to trough being around 10% in Sydney and a little less in Melbourne.”

In comparison, Aird says prices aren’t likely so decline much in the other capitals as they “simply didn’t experience the same growth in prices in the prior five year period”.

However, while he expect the Sydney and Melbourne-led reversal to continue until at least 2020, Aird, like most other forecasters, doesn’t think the modest downturn will become anything more sinister than that.

“We do not expect a hard landing,” he says.

“Population growth, driven by net immigration, is expected to remain strong. And rental growth is still positive, which ensures yields look reasonable in a low interest rate world.

“We also expect the unemployment rate to gradually drift lower, which means that the risk of default is low.”

While longer-term forecasting is often fraught with danger, Aird says the large gains in Australian property prices over the past three decades are unlikely to be repeated given official borrowing costs are currently at the lowest level on record.

“Given that household debt sits at a record high relative to income and the RBA cash rate is at a record low, there is also a valid question as to whether we are also at the end of the property super-cycle. That is, the capacity for dwelling prices to inflate beyond growth in incomes, as has previously been the case, is far more limited in the absence of even lower interest rates,” he says.

“As interest rates cannot go much lower, at least not in a material sense, we are unlikely to see the sort of growth in dwelling prices over the next 30 years that we did in the previous 30.”

A lot of demand has been brought forward, in other words, helping to push prices and household debt levels ever higher.

Given that mounting debt burden and the likelihood that lending standards will remain tighter than in the past, the likelihood of further debt-fuelled property price growth appears unlikely to repeat.

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