Figure 1. Hard landing.
The marketplace is overwhelmed by concerns about the gloomy property market. Buyers are holding back, which may cause the market to slip further resulting in a hard landing. Those negative forecasts in the media for the market in 2019 have contributed to this emerging turmoil.
What has happened in 2018
Australia has its property market stumbled through 2018 ended with price corrections for mainly Sydney, Melbourne and Perth, and marginal growth for other capital cities. Both Sydney and Melbourne have recorded approximately 5% correction for all property price brackets combined. Certain property segments have reported about 10% decline or even more. Some media even compared this correction with the property market during the GFC.
What is different from the property market during the GFC is that this correction is more or less managed by the policy makers (the Governments) with the expectation for soft landing. The property price in Melbourne stayed robust for the first 10 months of 2018 and declined faster with auction clearance rates dropped below 50% towards the end of the year. Then APRA declared that its policy measure has been successful and therefore the interest-only lending cap for banks was removed.
Lots of buyers have been “disqualified” by banks or restricted out by the current policy environment. Qualified buyers are still present in the marketplace looking to buy. These qualified buyers form the demand arm of the current market.
What should ideally happen from here
Since the demand arm of the market has already been slimmed to become healthy for the Australian economy, the policy makers should give some “absorber” for the landing. Otherwise the landing for Melbourne and Sydney might become a hard landing given that the price correction has already accelerated towards the end of 2018.
The “absorber” should be mainly to support the market sentiment. The observers, especially those institutions who provide market forecasts, should take into account the impact of their forecasts on the market sentiment. The impact is very often transmitted to the market through the media.
What has been happening upto date in 2019
Some institutions have released their forecasts for the property market in 2019. Given the fact that the correction of the market in Sydney and Melbourne has formed a downward pattern and the current policy environment, almost all these forecasts predict that the market will continue to fall in 2019, however with varying levels between 10% and 20% from peak to trough for Sydney and Melbourne. Some forecasted the trough to happen in 2019, most forecasted in 2020. These forecasts have been broadcasted to the marketplace through TV, internet, newspaper, etc. This therefore caused lots of qualified buyers to pause their property purchase, which then put pressure on the sellers and the sales results.
Those institutions’ forecasts are not reliable
Let us review some of the forecasts for the property market in 2018 made at the beginning of 2018 or at the end of 2017 by a few major institutions .
“We expect national dwelling prices to flat-line over 2018. But, there are likely to be some vairations between the capital cities, with Melbourne, Adelaide and Hobart prices staying in moderately annual positive territory while Sydney, Brisbane and Perth show modest falls.”
CommBank economists are forecasting that the Reserve Bank of Australia (RBA) will prepare markets in the second half of 2018 for a lift in the cash rate – currently 1.5% – in the Decembner quarter, and expect another RBA rate rise in the first half of 2019.
NAB in its Q3 2017 residential property market report predicted that the house price would rise between 3% and 5.5% annually for Melbourne and Sydney for both 2018 and 2019.
“House-price growth will trough at around 1 per cent year on year in the second quarter of 2018 according to a new ANZ Research model, before bouncing back to around 2 per cent for the year as a whole – still down from the 4.2 per cent growth seen in 2017.”
“We found changes in the lending rate to be the largest drag on prices in 2018, particularly in the second half of the year. Underlying this is our expectation the RBA will hike its policy rate twice in 2018, pushing up mortgage rates.”
The forecasts made by CBA, NAB and ANZ were all wrong.
When looking into the forecasts for the property market in 2017, it is found that most of them deviated from reality by significant amount.
My personal opinion
1. The media has been broadcasting those forecasts which were not reliable. This has caused unnecessary confusion and potential turmoil.
2. Those institutions should be aware of the limit of their forecasts, and declare the limit to the readers clearly. Otherwise those forecasts should be kept inhouse.
3. Those institutions should be aware of the social impact of the forecasts and include the impact into the modelling with a close loop method.
4. The media needs to be careful for what they broadcast. They need to be accountable for the social impact.
An accurate diagnosis of the current market condition can always shed light on the decision making for the market participarts. For further inquiries, please contact us to book in a consulting session (http://www.realestatelogic.com.au).