The FINANCIAL — Median housing prices in Sydney and Melbourne are overvalued by 14 percent and 8 percent, but will decline gradually, rather than sharply, over the next few years a report released today by KPMG Economics predicts.
Sydney median dwelling prices are forecast to peak at about $980,000 in FY2019 (up from $880,000 at 30 June 2016), and then gradually roll back to between $930,000 and $950,000 by the end of FY2021.
Melbourne median dwelling prices, by contrast, are expected to peak next year, pause for year or two, and then start to grow again. Median dwelling prices in Melbourne are expected to rise from about $650,000 as at the end of June 2016 to be between $720,000 to $740,000 by the end of FY2019. After plateauing, they will then regain momentum to be between $775,000 and $825,000 by the end of FY2021.
Brendan Rynne, KPMG Chief Economist, says: “Our forecasts show Sydney will experience a greater adjustment than Melbourne in the next few years, but this is likely to be gradual rather than a collapse in the median dwelling price. Whether or not the current Sydney and Melbourne housing prices constitute a ‘bubble’ is a matter for debate, but we estimate that short-term factors have pushed median dwelling prices above their long-term ‘equilibrium’ prices by about 14 percent and 8 percent respectively. But it should be remembered that this has happened before in Australia and prices have returned to equilibrium without the sort of crash we have seen in other countries after the GFC. We expect the same again to happen here now – we anticipate a cooling in price growth, and from next year prices will start to gradually come down. While prices are high now, they are still within known boundaries by historic standards.”
The report, Housing affordability: What’s driving house prices in Sydney and Melbourne, argues that Sydney house prices have become more volatile since the GFC, even though there has not been the same volatility in supply, demand and costs. It also finds there is a long-term relationship between house prices and variables including working population levels, stock of dwellings, rate of borrowing by property investors, and the adoption of stronger prudential controls by the regulator APRA.
Anecdotal evidence suggests the demand by Chinese investors for Australian residential property may have softened in recent months due a combination of factors, including the adoption of differential stamp duty in some States, and vacant property taxes for foreign buyers. Allied to this there has been the tightening of currency controls in China, while the Federal Budget move introduced a 50 percent cap on developers selling to foreign investors. The report argues that a dramatic rise in annual sales to FIRB-approved overseas purchasers from 2013 was an important reason behind the price surge in the last 4 years.
Brendan Rynne said: “Domestic investors will be affected by the APRA move to curb interest-only mortgages and we believe that monetary policy will start to tighten sooner rather than later. Investors both here and overseas have been the key driver behind the housing price boom and policymakers are now addressing this.”
In order to improve housing affordability, KPMG reaffirms its call for:
a reduction in the capital gains tax discount from 50 percent to 25 percent, thereby making property investment marginally less attractive
abolition of stamp duty on the transfer of residential property and conflation of rates, land tax, insurance taxes and emergency service levies into a new Property Services Tax
systemic reforms aimed at maintaining the supply and diversity of land and housing in established and growth areas, through setting targets, streamlining planning and empowering public supply
targeted reforms aimed at improving access to those groups who are the most excluded from affordable home ownership. This package would focus on more low cost housing, improved assistance to those who need it, and promoting shared equity.
Brendan Rynne added: “Housing is an area where government actions can have major consequences for the market, sometimes unforeseen. Recent measures by state and federal governments have started to cool the large price increases and they need to keep a close focus on housing affordability by carefully targeted actions”.
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