Australia’s property boom… officially over?

A leading investment bank has “called the top” of the Australian housing boom, declaring the days of double-digit price growth officially over.

According to UBS, our nationwide house price growth is set to slow to single-digits, or possible even stagnate completely, in the coming year.

UBS economists George Tharenou and Carlos Cacho predicted earlier this year that growth would taper to around 7 per cent for the remainder of 2017. However, they have since amended their forecast, and now envisage a figure of just 5 per cent for this year.

In 2018, Tharenou and Cacho say we can expect to see figures of 3 per cent or lower – a stark downturn from the days of 10 per cent gains. They have conceded that the deceleration of the market has occurred even faster than they envisaged, and add that it is likely this flat or low-growth period will be prolonged, lasting for a number of years.

The statement from UBS comes as auction clearance rates begin to fall in the latter half of 2017, while month-on-month price growth has remained flat for several months. Another factor putting downward pressure on the housing market is the recent macroprudential lender restrictions enforced by APRA, putting a cap on investor borrowing by limiting the amount of interest-only and high-LVR loans the banks are able to approve. This has seen lending to investors drop, while owner-occupier loans continue to increase.

While UBS expects that the Reserve Bank will put off any hikes in the official cash rate until the second half of 2018, that hasn’t stopped banks from raising their rates out of cycle, and this is putting immense financial strain on many over-extended households who have purchased at the height of the market.

So where is the property market right now?

Sydney records negative growth – slightly…

Over the past 55 years, house values in Australia have grown a phenomenal 6566 percent – and nowhere is this more evident than in the Harbour City, where prices have increased 74 percent since 2012.

But according to CoreLogic, house values in Sydney fell half a percent during October, marking two consecutive months of negative growth. In Darwin, prices are down 4.4 percent for the quarter, while the shaky market in Perth has seen a dip of 0.7 percent over the past three months.

Across the country, growth of just 0.4 percent in the quarter to October shows a definite cooling of what has been one of the world’s hottest property markets over the past several years.

How this forecast impacts investors

The good news for investors is that the predictions from UBS don’t include a market crash or sudden price collapse, as others have forecast.

Instead, their outlook is for a “soft landing”, a gradual levelling-off of growth over the next twelve months. They also predict that the RBA will raise the official cash rate sometime in 2018, which could send investors with large interest-only loans into selling, and combined with the tighter regulations imposed by APRA, will result in a stagnation in property values for a few years.

While this sounds like welcome relief for first-time buyers, it’s worth noting that a slowdown in the housing market could, in turn, drag down consumption, employment and general economic growth, as property owners who have paid top dollar at the height of the boom are forced to tighten their belts to meet higher repayments – on properties that aren’t yielding much in terms of capital growth.

Whatever happens, It is in no-one’s interest to see property prices heading down fast because real estate represents such a large part of Australia’s wealth, contribution to GDP and of course…. employment!