Prices still falling but not as fast

The rate of decline in home values across Australia has slowed this year, with four consecutive months of figures proving a change in market conditions.

While the downturn is not yet over and prices are still falling, they’re not falling as fast as before. This is a good indicator that the market might be nearing its floor and we’re through the worst of it.

CoreLogic data show national home values (houses and apartments combined) have been trending lower since the peak in September 2017, with the worst monthly fall in December last year at -1.1%. Since then, we’ve seen a change.

In January, prices fell -1.0% but then slowed to -0.7% in February, -0.6% in March and -0.5% in April.

Let’s compare to Sydney.  Prices peaked in July 2017 and have declined pretty quickly. The worst monthly fall was also December with a -1.8% dip. Price falls have since progressively slowed to -0.7% in April.

There is the same trend in Melbourne.  Prices peaked in November 2017. The worst monthly price drop was January this year at -1.6%. The pace of decline has since slowed to -0.6% in April.

Alongside this, we’ve seen higher auction clearance rates this year, holding around mid-50% in our big city markets; and there was an increase in lending to home buyers in February, according to latest ABS data.

Put this altogether and while it’s not enough to call the bottom, there’s definitely been a shift.

Sydney and Melbourne buyers should see this as an opportunity.  We’ve seen significant price falls and CoreLogic data shows the typical house is $120,000 cheaper now compared to the peak in both cities.

The savings are even bigger in the best suburbs where prices have fallen the most. Home values in the upper quartile are down -13.7% in Melbourne and -11.8% in Sydney.  This provides a great chance for families wanting to upgrade to a preferred neighbourhood or school catchment.

There’s also opportunity for investors in today’s market.  Investment activity is well down due to credit restrictions and smaller yields following strong price growth in 2012-2017. However, looking long term, there’s value buying out there today and potentially limited time left to negatively gear.

If Labor wins the election, investors will have to weigh up the long-term benefits of buying now at a more affordable price, having negative gearing grandfathered on their investment; and paying less capital gains tax when they sell versus waiting until after January 1, 2020 and hoping prices fall further.

This has not been a run-of-the-mill downturn. Prices have fallen at a faster pace with credit restrictions exacerbating a normal change of cycle in Sydney and Melbourne. Sydney values are down -10.9% and Melbourne -10.0% over the past 12 months. That’s not catastrophic.

CoreLogic reports “some tentative signs that credit flows have improved, albeit from a low base” and this will be important in the recovery. The high likelihood of an official interest rate cut this year will further boost market sentiment.

The unknown element is the Federal election. No matter who wins, the market will be affected. Proposed Labor policy will lead to a fall in prices, especially with apartments; and a rise in rents.  If the Coalition wins, I think the market is more likely to stabilise sooner.

The top and bottom of the market never becomes clear until after the event. I think today’s buyers are in the best position possible to purchase their next home or investment at more affordable prices, with a view to holding for the long term and reaping the rewards of reliable capital growth.

Published: Tuesday, May 07, 2019