The latest forecasters to weigh in on Australia’s property values are three academic researchers who reckon they have cracked the formula for correctly predicting house prices.
Using two decades of data, which notably does not reflect a recession in Australia, a preliminary research paper under review for the Economic Record predicts trends will diverge dramatically in Sydney and Melbourne this year.
Melbourne detached house prices are predicted to fall 9.2 per cent by May 2016, while Sydney prices would rise by around 6 per cent and then start plateauing. If correct, there will be no sharp falls ahead for Sydney even after what the Housing Institute of Australia (HIA) calculates to be a rise of 43 per cent in average prices for all dwellings in the Harbour City since May 2012.
The modelling also predicts an 8.1 per cent fall in house prices in Brisbane, a 5.2 per cent fall in Perth, and modest gains in Adelaide, Hobart and Canberra.
Property valuation provider Propell has a very different take. On Monday it predicted only Sydney’s apartment market will record significant growth over the next year, and says Melbourne's market could match or even overtake Sydney in the coming year.
All capital cities except Perth and Darwin recorded house price growth in June, while apartment prices were sluggish across the board, Propell says.
Until recently, house prices across Australia were for the most part in a widespread uptrend, with the odd quarterly decline. This uniformity is not a given though and masks the varying fiscal influences and different stages of the housing cycle in each particular state.
While mining states endure falling income, rising unemployment and attract less migrants, house prices in Sydney continue to play catch up after a decade of lagging growth. Supply restraints, a weaker Australian dollar, and a crackdown on investment loans are fostering stellar price growth even as home prices in neighbouring cities stagnate.
The median house price in Sydney has now reached $900,000, and is widely pegged to hit $1 million in the next 12 months, partly the result of its oceans, mountains and national parks, which restrict housing and lead to a tight supply situation.
The NSW economy is more diversified and less dominated by manufacturing and resources than other states, insulating it from the end of the mining boom phase in Western Australia, which has triggered substantial falls in house prices in Perth.
The migrants who were attracted to Western Australia and Queensland as the commodities boom insulated the region from the GFC are now increasingly choosing the US and Europe as destinations as Australia’s economic advantage narrows, and job prospects dwindle.
Australia’s 6 per cent unemployment rate stands above the 5.5 per cent rate in the US, and the jobless rates is at a 15-year high in places like South Australia.
New South Wales still attracted over 70,000 migrants last year though, far exceeding additional housing supply.
“The recent growth in Sydney is largely an economic story,” says HIA senior economist Shane Garrett. “As far as developed countries go, Australia’s population is a fast growing one,” he adds.
Sydney depends on international trade and services and tourism, and the decline in the Australian dollar has supported demand for housing. Thanks to the lower currency, expats coming from overseas are getting the equivalent of a 25 per cent reduction on what they were paying 18 months ago. So a $1m house becomes $750,000.
Perth’s dwelling values rose 147 per cent between 2002 and 2012, while values in Sydney only rose 37 per cent and Melbourne gained 85 per cent, close to the national average.
“If you had to pick a bellwether city, Melbourne would be it,” says Garrett.
Since May 2012, values are up 13 per cent in Perth, 43 per cent in Sydney and 26 per cent in Melbourne.
Source: ABS capital city house price index
Individual markets are not totally immune from neighbouring developments, and economists say strength in Sydney is likely to spill over to other areas as potential buyers weigh up the lifestyle they can achieve in Newcastle, Brisbane or Adelaide for less outlay.
House prices in general are also supported as record low interest rates reduce the opportunity elsewhere.
Gross rental yields fell close to a record low 3.6 per cent in March in Sydney compared with 3.8 per cent a year earlier, according to CoreLogic. But that is still better than in Melbourne.
Fluctuations in construction, which after hitting its lowest since the 1960s have recently surged in Melbourne and Sydney, may finally improve supply and ease price growth, particularly in apartments.
New home building was at a record in 2014 at over 200,000, and the HIA expects a similar number in 2015.
“When it all comes on there is potential for some indigestion,” says Commsec chief economist Craig James.