A top property analyst has forecasted a 20% drop in property value in Sydney and Melbourne and says that “it cannot be ignored.”
Dr. Shane Oliver, Head of Investment Strategy and chief economist at AMP Capital, believes the writing on the wall for Sydney and Melbourne’s property prices has been around for more than a year:
“Starting about a year ago it seems the tide has turned against property prices. Property prices in Sydney and Melbourne are likely to see top to bottom falls of around 20% as credit conditions tighten, supply rises and a negative feedback loop from falling prices risks developing.”
He said that the tide has turned against the value of properties due to poor affordability, stricter bank lending standards, cutback in foreign demand, surge of unit supply, out of cycle bank mortgage rate increases and reduction of pool property investors.
For 12 months in a row, house prices in the two cities have dropped. After property prices peaked more than a year ago, Oliver previously forecasted a 15% price drop spread out to 2020.
However, he now foresees a 20% drop in prices spread till 2020 due as indicated by 7-8% price declines in auction clearances in the recent weeks.
Dr. Oliver stressed that a number of conditions have to be in place for a property price crash to happen:
“A crash is a risk but remains unlikely unless we see much higher interest rates or unemployment (neither of which are expected) or a continuation of recent high construction for several years (which is unlikely as approvals are falling) and a collapse in immigration.”
However, he warned that the risk of a crash cannot be disregarded because financial institutions may overreact and tighten up which will drive investors to pull out in the face of falling returns, low yields and possible adjustments to negative gearing and capital gains tax.
Now that the boom has turned into bust, he advises investors to look outside Sydney and Melbourne and focus on other cities and regional areas that offer much better value.