Our predictions for Australian property in 2019

After five years of growth between 2012 and 2017, the median property price across state capitals dropped around five per cent in the 12 months to the start of November, according to CoreLogic, led by annual falls of eight per cent in Sydney and six per cent in Melbourne.

Property prices had overreached at the top of the cycle in Sydney and Melbourne, with values wandering into territory where potential buyers found them unaffordable.

The retreat in those cities has been exacerbated by borrowers – especially investors – facing tighter than usual lending restrictions, due both to regulatory changes and to the big four banks projecting outwardly (somewhat obviously) that they are getting their houses in order prudentially during the banking royal commission.

In contrast, smaller capitals – notably Canberra and Hobart – outperformed the broader market in 2018, buoyed by interstate investors seeing value in these locales.

In 2019, I think we’ll see a convergence in performance of our capital cities.

Sydney and Melbourne prices will probably drift downwards in the first three to six months. That forecast is based on continued lending tightness by the banks until the dust settles after the publication of the final royal commission report in February and a general skittishness of participants. The downward trajectory will only be broken when a critical mass of discretionary prospective buyers sense there is value.

Prices in these large capitals might fall by a further 3 to 5 per cent by Easter 2019, at which point they could plateau for the rest of 2019. In absolute terms, I expect prices in Sydney to be around 12 to 14 per cent lower than their peak of September 2017 and prices in Melbourne to be 9 to 11 per cent lower than their peak of November 2017.

Unlike many other commentators, I don’t think the likely change of federal government expected in May next year will be that significant a factor for the market. 

The grandfathering provisions in Labor’s negative gearing and capital gains plans should smooth out the transition to the new regime. The market will be boosted in the months leading up to implementation as some investors jump in to try to beat the change of rules, which may actually cause prices to stabilise sooner than my Easter prediction above. Indeed, I know of investors who are looking to transact as soon as they can.

The biggest risk is an excessive delay between the election and the proposed policy becoming enacted, because it will artificially concentrate most of the year’s transactions into the period before the changeover, creating unwelcome distortion to the market.

I am sceptical that the positive growth of smaller capital cities can be sustained for much longer. The perceived value on offer over and above larger cities’ assets is shrinking, especially when considered in the context of the far larger economic and population base, and steeper growth trajectory, of our major cities.

Therefore, autumn 2019 could see prices in our smaller cities plateau and then fall up to 5 per cent across the rest of the year.

There will be a further and welcome contraction in the supply of new high-rise property in our capital cities in 2019, which will extend the outperformance of apartments – particularly older-style units – relative to the broader market we saw in 2018.

Should these outcomes eventuate, it will be painted by some as the popping of the property bubble. 

In reality, a measured recalibration of prices represents a well-needed breather for the market.  And while it is inevitable and regrettable that some marginal borrowers will be hurt, most property owners of mainstream residential assets in our major capitals will be unaffected. And of course, there will be greater affordability for first-home buyers.

- Richard Wakelin