There will be a housing oversupply in all major capital cities except Sydney by mid-2017, but house prices will only fall modestly, writes Robert Mellor.
Often their analysis is based on examining the ratio between median house prices and incomes at a capital city or national level, and comparing them to historical figures and other OECD countries. This is a flawed analysis of housing affordability. By comparing historical data, it is not taking account of the substantial impact on housing affordability from the decline in housing interest rates since the mid-1990s.
When comparing our house price-to-income ratio, overseas analysts should use household income data rather than individual income. They point to our figures being way out of line with many other countries, in particular the United States. I believe this analysis is not a reason to predict a major correction in house prices in Australia, nor even in our highest-priced cities, Sydney and Melbourne.
Australians are free to choose to spend a higher proportion of their income on housing but less than the US on health and defence. That is a choice we make as a society and, by the way, we were doing so back in the 1970s and 1980s.
I am not saying there won’t be price corrections in residential property markets around Australia over the next two to five years. But, with the exception of mining towns, the declines are likely to be limited to between 5 per cent to 10 per cent in nominal terms in certain capital cities.
In particular, in market segments such as high-density apartments in the Melbourne and Brisbane CBDs, nominal price declines could go as high as 10 per cent to 20 per cent, because we are going to see a massive oversupply develop in these markets over the next one to two years.
CONTRARY VIEW
While some continue to talk about the undersupply of dwellings across Australia, BIS Shrapnel has been highlighting for the past year that the majority of capital city markets, with the exception of Sydney, will be going into oversupply by mid-2017.
It needs to be understood that since 2010, house-price growth in Brisbane, Adelaide, Perth, Hobart and Darwin has been below the inflation rate and given these cities are already oversupplied, or will be by 2017, we think modest nominal declines are possible and falling real prices are certain over the next three years.
In Sydney, despite a record 45,000 dwelling commencements in calendar 2015, it needs to be remembered that between 2006 and 2014, there was a massive underbuild and it was this undersupply that has driven price growth of over 55 per cent in median house prices in Sydney since September 2012.
Rental vacancy rates remain at 2 per cent and there is an extremely low risk that any oversupply will develop in the Sydney market before 2020, unless high-density apartment commencements are sustained at current record levels.
Given the drop in investor demand over the past six months, we forecast an easing in off-the-plan apartment sales over 2016-17 and 2017-18. In this scenario BIS Shrapnel’s forecast is for median apartment prices to decline by a modest 5 per cent to 7 per cent by late 2018 and even less for detached houses.
In summary, we are forecasting modest price corrections in residential property markets across the major capital cities rather than dramatic declines of 20 per cent to 30 per cent.
Robert Mellor is BIS Shrapnel’s managing director.