Residential Market - Correction or Collapse ?

There has been a lot of talk in recent weeks about the potential for a significant correction in the values of houses & apartments, particularly in Sydney and Melbourne.

AMP's Chief Economist Shane Oliver was the latest to join the discussion, suggesting that prices in Sydney and Melbourne will fall 20% by 2020. Shane has often expressed a view that Australian housing markets are 30% over valued and he has traditionally favoured equities over property, so his current view is not dissimilar to his long held belief about Australian real estate prices.

QBE, in conjunction with BIS Oxford Economics, also issued a 3 year forecast into the Australian Housing Markets following a very in depth dive into the various forces driving each state, including migration & population growth, and supply & demand. QBE paints an equallally pessimistic view of 2019 but is far more moderate for 2020 and in fact suggests that 2021 will see price growth return to most markets.

Below is a graph of the median Real Estate Institute of Australia's Apartment prices across Sydney, Melbourne, Brisbane and Canberra from 1980 to 2018. A dark blue dotted line in the forecast period reflects the AMP Capital House View and the bright blue dotted line the QBE House View.

As the graph indicates, AMP's view, particularly for Sydney & Melbourne is even more dramatic than the 1990's and 2005's slow down, and in my mind is difficult to justify. AMP points to the oversupply of apartments, the lack of investment returns and the challenging funding markets as the key elements to the dramatic correction in prices.

The QBE forecasts are quite divergent to AMP from 2019 onwards and reflect their view of a range of indicators including affordability, population growth etc, clearly taking a more positive view on migration & population growth and the low vacancy rates and slowing supply across the markets.

CMA's view is more aligned with QBE than AMP's. We feel that the current oversupply and funding constraints will continue to see prices ease through the rest of 2018/19, however with Sydney's substantial infrastructure spending and general economic conditions continuing to support employment, we expect vacancy rates to drop by mid 2019 and for price growth to return in 2020.

For Melbourne, CMA's view is very similar to QBE with prices easing in 2018/19 followed by minimal growth, in line with inflation for 2019 to 2021.

For Brisbane, CMA is a little more optimistic than QBE and AMP. We feel that net migration will continue to support reductions in vacancy levels in 2018/19, leading to some price growth in the later part of 2019 and as economic conditions and affordability drive further migration, we expect prices to growth ahead of CPI in 2021/22.

One of the unknown factors that may affect future values is the impact that the Federal Government's policies may have on investment. Changes to negative gearing and capital gains tax could have dramatic impacts on values if a broad approach is taken across the market on these policies.