No pop in housing ‘bubble’: Sydney, Melbourne to deflate gradually, KPMG says

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Michael Bielby| Australian Financial Review| 20 June 2017

Housing prices in Sydney and Melbourne have been pushed to the “upper stretch” of their historical growth rate and will fall back moderately, a new report by KPMG Economics says.

Sydney’s median dwelling price would suffer a likely real decline – excluding the effects of inflation – of up to 11 per cent as the cycle turned in the NSW capital after 2019, but inflation effects would limit the nominal fall in price from $980,000 to $955,000 in 2021, says the report titled Housing affordability: What is driving house prices in Sydney and Melbourne?

In Melbourne, the likely real decline of 4 per cent would mean little fall in prices after inflation, with the nominal median dwelling price likely to plateau at $740,000 by June 2019, before rising as high as $825,000 by June 2021, it says.

The benign outlook, which expects less of a price correction than Sydney suffered in the early 2000s, reflects the fact that even though tighter credit controls are crimping demand for housing now, investors still account for a greater proportion of the housing market than they did 17 years ago and faster population growth means there are more consumers of housing than that time.

This meant prices could rise more than they could in the past without triggering a bust, KPMG’s chief economist Brendan Rynne said.

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“They’re over-inflated, but not so far over-inflated that it puts it in the bubble territory,” Mr Rynne told The Australian Financial Review. “We anticipate that the short-run factors will start to cause a moderation and contraction in house pricing, but it’s not anticipated to be of the magnitude or duration of the largest price correction that occurred in Sydney in the late ’90s, early 2000s.”

Mr Rynne said the KPMG report was consistent with official figures released on Tuesday that showed house price growth slowed in both Sydney and Melbourne in the March quarter from the frantic levels seen at the end of last year.

While Sydney unit prices picked up 11.1 per cent from the same quarter a year ago Brisbane values fell 0.4 per cent from a year earlier. Apartment prices in Melbourne grew faster from a year earlier, up 3.9 per cent compared with 3.2 per cent in December. On a quarterly basis, Melbourne unit prices fell 0.7 per cent, their first decline in a year.

“The fact that we’re seeing a pattern emerging out of actual data that is coincident with our annual expected outcomes gives us confidence that our analysis is on the right path,” he said.

The prediction of an easing, rather than a crash, in the country’s two largest housing markets is reassuring. After the March quarter housing figures on Tuesday, Capital Economics economist Paul Dales warned of a large correction.

“The first quarter of this year will probably go down in history as the point at which house price inflation peaked,” Mr Dales said. “Policymakers have engineered the slowdown that appears to be under way, but there’s surely a risk that it goes too far too soon.”


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