The slowdown in house price growth that emerged through 2017/18 is expected to continue into the 2019 financial year, according to leading industry analyst and economic forecaster, BIS Oxford Economics.
BIS believes house prices in Melbourne will tread water through to 2020/21, rising below the pace of inflation.
They suggest that one of the biggest factors in the lack of median house price growth is the new supply which is continuing to rise.
They are forecasting just a one per cent per year increase in the median house price, before an emerging downturn in new dwelling construction results in the city’s deficiency starting to trend upwards by 2020/21, which in turn will see a modest pick up in price growth.
A six per cent growth in the median house price in the three years to June 2021 is what BIS is forecasting.
The median house price soared 65 per cent over the five years to June 2017, with a further growth of two per cent in the six months to December 2017, before a 0.2 per cent drop in the first half of 2018.
Population growth and new dwelling supply have been cited as the biggest drivers in the median increase.
Investors drove the strength of the market in Melbourne, although not to the same extent as in Sydney.
Loans to owner-occupiers in Victoria were also at record levels in the year to March 2018, which has helped to offset the weakening investor demand. Consequently, the house prices in Melbourne have held up better in 2017/18 compared to the decline in Sydney.
Sydney’s median house price is forecast to still be lower than its June 2017 peak by 2021.
The weaker investor demand is coinciding with rising supply and an erosion of the city’s dwelling deficiency, which has alleviated pressure on prices.
Although the market is expected to remain in undersupply, the drop in investor demand is expected to override the undersupply of dwellings, which in turn is forecast to result in modest price declines.
Angie Zigomanis, BIS Oxford Economics senior manager, said more downside is forecast for Sydney.
“In New South Wales and Victoria in particular, where the strength of investor demand has been a key driver of the Sydney and Melbourne residential markets respectively, the decline in investor activity has impacted price growth,” said Zigomanis.
“More downside is forecast for Sydney as it has had a much greater dependence on investors through the most recent upturn.”
“Similarly, greater downside is expected in the unit market, which is more reliant on the investor market to drive sales and price growth.
“Without the same level of investors and without the same growth in new supply, the detached housing market should hold up better compared to units.”
BIS suggests Brisbane is expected to see the greatest upside to house prices over the next few years due to Queensland’s net interstate migration increasing.
Price rises are expected to be modest over the next two years, however, BIS see a price growth acceleration in 2021.
Perth and Darwin have bottomed out, and any recovery in prices will be a slow grind.
Excess stock, low population growth and weak economic and employment growth are the biggest drivers, suggests BIS.
They find a similar story in Adelaide, with a subdued economic environment and limited population growth also having a dampening effect on prices.
Hobart and Canberra are expected to continue their strong growth in 2018/19.
The lack of supply in Hobart is continuing to drive their price growth upwards.
Price growth in Canberra began to slow in 2017/18, but BIS expects that, due to the relatively high incomes in the capital, there will be further house price growth over the next two years.
Both markets are expected to decelerate through to 2020/21 as new dwelling supply rises and affordability becomes more strained.
Zigomanis says that with the banks tightening the screws on investors, the increased restrictions on their borrowing capacity have reduced the likelihood of investors bidding up prices.
This has caused all markets, with the exception of Hobart, to record a slowdown in price growth performance over 2017/18.
Notably, after experiencing strong gains since 2012/13, house price growth is on track to have recorded a negative number in Sydney and Melbourne through the year.
Both these markets benefited most from booming investor demand, and the tightening credit conditions are now having an impact.
However, the prospect for a major correction will be mitigated by low interest rates and a relatively stable, albeit subdued, economic environment.
Very strong population growth nationally is also underpinning occupancy, which in turn should help investors generate rental income, albeit perhaps at a discounted rate in some cities.
This will prevent excessive forced sales coming to the market to drive down prices.
“Supply is running at record levels, having risen above 200,000 dwelling completions per annum in 2015/16, and expected to stay above this level through to 2018/19,” said Zigomanis.
“Demand has also risen, with population growth expected to exceed 400,000 persons in 2017/18, its highest level since the peak in net overseas migration in 2008/09, although this will still not be sufficient to meet supply.”