Australia is one of the most likely countries in the world to clock property price falls, a new ranking shows, after prices boomed over the past two years.
Property prices are high compared to rents and incomes, the Bloomberg Economics research found, although local experts caution prices will not necessarily drop far enough to get back in line with fundamentals.
Australia ranked fourth in the OECD for the risk of a property price correction, behind New Zealand in first place and just ahead of Canada in fifth, two other countries where property markets have been hot for years.
READ MORE: Emma Stone makes millions on beach house sale
Central banks around the world, including Australia, cut interest rates to support economies during the pandemic, allowing buyers to borrow more and pushing property prices higher.
As economies recover, interest rates are going up and property markets are starting to slow.
In Australia, the largest cities are driving the downturn. Sydney home values are 1.4 per cent lower than three months ago, while Melbourne is down 0.8 per cent over the last quarter, on CoreLogic data.
“The pandemic unleashed a massive property boom, not just in Australia but globally,” AMP Capital chief economist Dr Shane Oliver said.
“House prices surged relative to rents and incomes … Now what’s happening is it’s all reversing – the ultra-low rates we saw, which underpinned much higher property prices, are now in the process of reversing.”
READ MORE: Kyle Sandilands’ $8000-per-week Sydney mansion
But just because house prices are high compared to incomes and rents does not mean they will fall, unless there is a trigger such as rising interest rates, banks making it harder to get a home loan, or an increase in unemployment, he said.
He thought property prices were about 35 per cent overvalued when comparing them to rents and adjusting for inflation, or 25 per cent when comparing prices to their long-term trend, but emphasises he does not forecast falls of that magnitude.
His base case forecast is that prices will fall 10 to 15 per cent nationally and a little more in Sydney and Melbourne, with a risk the national falls could be as deep as 15 to 20 per cent.
This would be larger than the 2017 to 2019 downturn, but less than a simple comparison of property prices to rents might suggest.
“Saying it’s a bubble, it’s going to burst, has proved to be an overly negative way of looking at things for the last 20 years,” he said.
Westpac senior economist Matthew Hassan expects property prices to keep falling, but not to a level where they would be in line with fundamentals such as rents and incomes.
“That’s why these measures are so fraught, they assume there’s a gravity these measures are capturing that we revert to, and I don’t think that’s the case,” he said.
“It’s a funny old bubble that lasts a decade.”
When comparing property prices and rents, he said broad measures were not as appropriate as looking at the price of investment properties compared to rents, as these types of homes can differ significantly from the wider housing stock. Unit prices have not risen as fast as detached house prices in the pandemic.
Hassan said rising interest rates would affect most, if not all home buyers, but are not captured in the table. Credit growth has been sustained but not red-hot and established owners have been repaying their mortgages ahead of schedule, he added.
“International comparisons are always really tricky and the reason they’ve done it this way is these are the measures for which we have the best internationally comparable data,” he said.
“The conclusions are kind of the same – New Zealand, Australia are both in a correction phase of their markets, and given our views around inflation and interest rates, that has further to run and is shaping as a sizeable correction.”
PRD Real Estate chief economist Dr Diaswati Mardiasmo said even though property prices are high compared to incomes, wages are now starting to rise.
And income measures do not account for rising demand from a pick-up in migration as borders reopen, or from first-home buyer assistance in the recent federal and NSW state budgets, she said.
Prices would also depend on the supply of new housing, as a building boom struggles with a shortage of materials and labour.
“The only reason why the RBA is increasing the cash rate is because they think the economy is strong enough to be able to withstand all of this,” she said.
This story first appeared in The Sydney Morning Herald.