Price Correction: Why, How Much, And How Long?
Overall, Australia had its first annual real estate price decline since 2012. How far will it go?
First, why did this happen? There are multiple factors which worked together to cause the fall.
It has been argued that property prices, especially in the larger cities, have been in a “bubble” for some time.
Supply and demand are certainly a primary cause, but not the only one. Overconfidence and over-speculation in the market can have some effect.
Another factor has been money laundering by organized crime. Criminal money from China — and other countries too — has contributed to higher prices because money launderers are willing to pay more. And once a property sells for a high price, it tends to raise prices for other neighborhood properties.
But while that is surely a contributor, it is not clear just how much.
In any case, we know prices have risen. So what caused the fall? There are many more easily discerned factors at play there.
A realization that prices had already gone too high no doubt contributed.
And the Chinese crackdown on foreign investment.
And the reduction in approval of foreign investors.
And the crackdown on money laundering by the Australian government.
And the crackdown on underquoting by state governments.
And the crackdown on real estate fraud and mismanagement, particularly in QLD and NSW.
And the tightening of mortgage credit, accompanied by generally stricter lending standards.
Added to the looming expiration of a large percentage of interest-only loans.
Those are a lot of potential causes. All of these things, which we reported on at the time, played some role. Some more than others. But the fact that they all happened at nearly the same time, or in short succession, has surely been a major reason for the decline.
So we know some of the causes. What about the severity of the downturn?
Overall across Australia, prices are down about 2% since December of last year. Unit prices have showed a similar decline, down about 2.2%.
Of the biggest cities, Sydney has been the worst hit, at about -4.5% over the last year.
Many economists are predicting the downturn could eventually be as much as 10%.
But that number must be kept in perspective. As Alan Oster of NAB says: “People say ‘well it could fall 10 per cent’… Well, yes but it’s still 30 per cent above where it was two years ago.”
Gareth Aird, senior economist at CBA, had a similar view.
“A fall in prices in Sydney of 10 per cent from peak to trough would take them back to their September 2016 level. And a fall of around 7.5 per cent in Melbourne from peak to trough would take prices back to their December 2016 level.
“We don’t see prices softening much in the other jurisdictions as they simply didn’t experience the same growth in prices in the prior five-year period.”
Analysts have predicted the slowdown could continue between 1 to 2 years.
Interestingly, however, forecasts by ANZ Research (see chart below) show prices going low this year, then recovering somewhat (but still not up to their former level) in 2019.
Analysts have been predicting a slowdown for some time. And one must admit that what they said has come along. But if analysts were consistently good at predicting the future, there would probably be no “bubbles” or “corrections” in the first place.
Only time will tell for sure.
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