Q+A: We're in a house price downturn. How bad could it get?
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Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics and more. I'm Sean Aylmer. Australia's housing downturn appears to be deepening. House prices in Sydney have fallen more than 1% in the last month alone. Melbourne continues to weaken. Auction clearance rates are hovering near record lows. And some economists are now forecasting house prices in the two biggest cities could drop by as much as 8% by the end of the year. Jonathan McMiniman is head of economic forecasts at Barron Joey. Jonathan, welcome to Fear and Greed Q&A. Thanks for having me, Sean. Without scaring the bejeebers out of me, Jonathan, how worried should we be about house prices?
Look, I don't think we should be particularly worried about house prices in a sort of longer term sense.
What factors are contributing to Australia's housing downturn?
House prices have continued to rise for a very long period of time. And you'd have to be a pretty brave soul to bet against the Australian housing market over a long run perspective. But what we are seeing right now is a short-term cyclical downturn, something similar to other downturns that we have seen more recently. If we look back at 2023, we saw quite a major downturn in Sydney and Melbourne during that period of time. And again, in 2019, quite a large downturn occurring then post the Banking Royal Commission. This sort of downturn that we're looking at now is probably a little smaller than both of those fairly recent downturns. And what we know is that after both of those downturns, we continue to see pretty strong price growth in Sydney in particular.
So we would expect a recovery on the other side. So no need to panic at this point.
Okay. So the long-term trend is your friend, as you economists like to talk about, but the short-term, it could be a bit rocky. Let's talk about the reasons. Is it all about interest rates and the federal government's budget changes?
It has a lot to do with both of those. We would say that the lift in interest rates that you've seen after three rate cuts last year, we've had three rate hikes this year, in quite a quick succession, both in February, March, and now more recently in May, that has taken a lot of the steam out of the most leveraged property markets. And that is largely Sydney, and then in many cases, Melbourne, particularly the top tier housing markets. in Melbourne as well. And that is slowing those property markets pretty quickly. We'd say about 60% of the correction that we've seen to date, probably a little more than that, has to do with those interest rate changes alone. Beyond that, we are saying that there is a drag coming through from the budget and those tax changes for investors is a big reason for that.
But another is that the negative sentiment that has taken hold since that budget has amplified the effect, we think, in the short term within the property market. We think it's a little overdone given that these tax changes only affect investors. They are a third of all buyers, remembering. But we do think it will take a little time before people really adjust to the new calculus that they have to do when it comes to the tax changes.
What about the supply side of it? Because for a couple of years, we've been talking about a lack of supply. The government, I think, was $1.2 million over five or six years. I can't quite remember. So, you know, we wanted to get a run rate of $240,000. I think we're probably at $190,000, $195,000. Is that something that again, long term, still an issue, but for the next little bit, won't be at the fore?
Yeah, so housing supply probably has picked up a little bit. It is falling very well short of the government's targets. And there's some pretty good reasons for that. It is very hard to build mass market housing profitably if you're a private sector builder, which is where all of this building work gets done. remembering the government doesn't actually build homes themselves. They rely on the private sector to do so. And the private sector hasn't been able to get up to those sort of targets we've been talking about.
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