Kate O'BrienBy Kate O’Brien, Director – Edney Ryan Wealth Management

Australian dwelling values slipped 0.1 per cent lower in May, according to the latest CoreLogic housing market update.

The fall marked the eighth consecutive month-on-month fall and took the annual change (-0.4%) into decline for the first time since October 2012.

CoreLogic Head of Research, Tim Lawless, said the biggest declines were in Sydney and Melbourne, while regional dwelling values crept 0.4% higher.

What’s Behind the Decline in Sydney and Melbourne?

With property prices in Sydney and Melbourne receiving record capital gains over the past five years, the decrease in these cities may be nothing more than a simple adjustment. After all, it is not uncommon to see an adjustment following a property price surge.

Further tightening in lending serviceability criteria – especially on local and foreign investor loans – may also have had an impact on property prices in these cities, with some experts predicting falls of a further 5 per cent this year.

Finally, we must not forget the power of consumer sentiment. With talk of price decreases, some consumers may choose to hold off buying while they wait for prices to fall, their behaviour eventually leading to the decrease they want.

So, Are We Heading for a Crash?

It is important to remember a crash is far different to a simple decline or market correction.  Before a crash, you will often see dramatic increases to interest rates, the unemployment rate and the supply of property will outstrip demand. The following indicates Australia is far from a property crash:

  • Interest rates – Australian interest rates remain at record lows and there is no evidence to suggest the RBA will raise the official cash rate any time soon.
  • Unemployment – The current Australian unemployment rate is 5.6 per cent and is not predicted to rise.
  • Supply v. demand – Dwellings are struggling to keep pace with demand in many major cities – particularly Sydney and Melbourne. Population growth also remains strong in these areas.

It is Not All Doom and Gloom

While there are weakening property prices in Sydney and Melbourne, by contrast, other capitals remain at (or close) to the bottom of the market. Adelaide and Canberra are seeing moderate increases and Hobart is continuing to grow.  Regional areas are also likely to continue their capital growth, indicating the decline is mostly restricted to the Sydney and Melbourne markets.

Experts predict property values in Sydney and Melbourne will continue to fall over the short-term as the market continues its natural correction.  Buyers will start to return to the market when they consider prices to be at fair value. However, only time will tell how this will play out.

Kate is an Authorised Representative of Hillross Financial Services Limited (AR Number 1007833).