ANZ's chief Australian economist says house prices in Sydney and Melbourne could fall 20% from their 2017 peak, but the big question is how this affects the wider Australian economy

ANZ's chief Australian economist says house prices in Sydney and Melbourne could fall 20% from their 2017 peak, but the big question is how this affects the wider Australian economy

ANZ in Australia has revised its forecast downwards for the Australian housing market, and now believes house prices in Sydney and Melbourne could fall by 15% to 20% from their 2017 peaks.

The bank had previously been expecting price falls to be limited to 10% to 15%.

In a Double Shot interview with interest.co.nz, ANZ's Head of Australian Economics David Plank said recent price falls in Melbourne and Sydney had been greater than the bank had been expecting.

"It became clear a month or so ago that our forecasts weren't bearish enough, mainly in Sydney and Melbourne," he said.

"So we revised it down to 15% to 20% which, if we are right, will be the biggest fall ever in nominal house prices." 

Plank said the downturn was mainly the result of credit tightening in Australia.

That was partially due to banks themselves being more cautious and partly due to stricter lending criteria which regulators had put in place.

But there is a concern that a slump in house prices could cause a wider economic downturn. 

Plank said that was not the case at the moment.

"Businesses are telling us that things are pretty good and so we are seeing employment growth remain strong," he said.

"We've seen business intentions in terms of investment, rising.

"So at the moment it seems that this correction in housing is happening, ... and if you look at everything else other than housing, it looks pretty good.

"The issue then becomes, can we have a sizeable correction in house prices, and this will be the biggest we've ever had, without it having a flow back effect on the rest of the economy.

"And that's essentially the million dollar question people are trying to form a view on."

Plank said that as prices fall, affordability improved and at some stage buyers would start to become more active in the market again but they were likely to remain cautious until late next year.

"By late next year we should start to see the market stabilise [but] I wouldn't expect a surge in pricing," he said.

Here is ANZ's full report on the Australian housing market.

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70 Comments

18
up

Continued prosperity in NZ's two largest trading partners economies now rest on house prices. Everything is on the house. As we come over the crest, we will also experience the downside of globalization. Like it or not, we are all in this together.

10
up

Yes totally agree we are all in this together. This was predicted and we all knew that as soon as the money stopped flowing in from China that there would be a significant downturn.

Now it's just a question of how big a downturn and how much will this effect the banks and therefore the rest of us?

Better Dwelling article: China’s Massive International Real Estate Buying Spree Is Officially Dead
https://betterdwelling.com/chinas-massive-international-real-estate-buyi...

It's easy to see the current vicious circle has been self created by the banks and regulators. So now that sydney and mel home prices are on the down and affordable, at what point do fhb start buying and taking advantage of the buying opportunity? I think the smart ones will be watching very closely and waiting....for the ideal house at the right price. The rest will probably wait too long and continue to miss out and remain as renters long term. And if auckland experiences the same effect,,, then will PP2F and HO and pragmatist do as they have been telling us???

12
up

" the current vicious circle has been self-created by the banks and regulators". No, it hasn't. Had their customers not borrowed from them what they have, property prices would not have ballooned to grotesque proportions.
Now we have a system threatening debt problem, and if we are smart, we'll fix it once and for all. In the grand scheme of 'let's not let a good crisis go to waste' let's make sure we never again encourage our peoples to get on the 'get rich from property' train. If there has to be a nasty correction; so be it. Because whether it's now ot later, it's coming.

Oh yes there has, bw. Quote from Plank " ... the drivers of the downturn relates to credit tightening " ... mishandled. Changes in lending policy and loan assessment criteria started in 2017 in Australia. And plainly mishandled by them. Lending has been handled better and earlier on this side of the ditch, the rbnz undertook those changes in 2015 and there has not been a collapse in the hyped auckland market. There could have easily been a collapse but instead a gentle landing.

10
up

Houseworks, we all wish for a gentle landing however, the flood of undiscerning foreign money seeking higher returns, has dried up and left us stranded in a sea of over valuations. These "to big to fail" valuations, are supported by interest rates already at 70 year lows. A correction of unknown magnitude is still in front of us, not behind us. To the man on the street, NZ might seem unaffected by Global goings on but, sooner or later, it will become apparent how vulnerable we always were.

This is not a time for celebration. It's quite the opposite.

You have been saying that now for how long??? The predicted 2018 house price collapse has not occurred, contrary to your wishes of property market doom and almost daily reporting of online realestate.co.nz auckland listings tally

Houseworks, my prediction of a -5% house price decline, for Auckland, is hardly a collapse. Are you now labelling Sydney's falling market a collapse? Just 3 1/2 hours away and they're getting cheaper!

To many Central Banks, the next downturn must be one of the most anticipated of all time. In knowing this, tools are still at work as a way of providing ongoing life support. When these prove to be no longer effective, we are in real trouble.

Anyway, you're on record as being ahead of the risk as you've already erected "for sale" signs. Might pay you to study the the IRD website under the "initial intention" provisions for any CGT liability? Just a thought.

I said your "wishes of property market doom " of negative 5 percent. I didnt classify THAT as a collapse. It has been repeated so many times we should all believe it by now, even though -5 hasn't even happened. Am looking forward to 1 jan 2019 to read the updated forecasts, oh yesss

Houseworks, it's so easy to label those who forecast a decline in house prices (of any magnitude) a doom and gloomer especially when your retirement hangs on it.

Have you ever considered a more balanced investment portfolio?

Have you ever considered .... balanced portfolio

Do I need to? And when you only hold a TD are you qualified to ask that question?

Houseworks, Yes. In desperation to press your point you omitted my house and Kiwisaver fund. No speculator or bank is my Landlord.

Wow I didnt see that wonderfully creative definition coming ... to now say that "my house" is a part of your balanced investment portfolio. You are a landlord, albeit with yourself as tenant...2018 has been a good year, first I had you admit to us all that you are in fact a property owner, which you took a verbal beating over your previous deceit, and now you class that property, part of your "balanced investment portfolio" making you a landlord of sorts. Thank you

That's a weird response.....

One of the comments
12.4.18 "Tired-Poppy is as keen as mustard in accumulating property and growing his wealth........
His comments here are aimed at driving down house prices, so that he can purchase more of them cheaply.
For that reason, he's sometimes called "Mr Duplicity".
TTP"

Houseworks, a misinformed comment from the resident Agent all ya got? The following is more of an accurate definition of a cornered Spruiker;

by Houseworks | Tue, 04/09/2018 - 18:18 - My mortgage statement is just fine thanks for mentioning it. I only need to refer to it once a year when I claim the interest as a tax write off against my income to legally reduce tax liability, isn't it good. Cue the uproar from the permanently envious herewith"

Ring Fencing legislation isn't the friend of the negative geared speculator.

You should try and understand more ;) "...tax liability" is the result of positively geared property while ring fencing only affects negatively geared.

Have a good sunny afternoon

"Balanced investment portfolio", "omitted my house" ... you win the prize .... comment of the year award! Haha

...and now come the insults from another cornered Spruiker. BLSH sure could do with your company.

Houseworks, I now see you've had second thoughts and edited out the insults :) It's all too easy spotting a cornered Spruiker.

Probably best to remember that the long term average price to household income is approx 3.5. For Sydney and Melbourne the multiples are 12.9 and 9.9 respectively. Plenty of scope for a huge fall. The best that you can hope for is a very long gradual fall as wage and salaries increase. Remember that house prices in Tokyo fell 74% between 1988 and 2005.

We will need a degree of "me to" on this, otherwise NZ qualified youth export will continue. Anyine seeing NZ banks changing their tune based on Aussie parent?

So, if ANZ’s forecast has shifted up in terms of the size of the drop, how has that affected their lending behaviour? Because if it has sparked a further round of tightening of lending criteria then that will create a further round of price drops. I’d like to read more about what is happening with loan management practices such as interest only rollovers

"Sydney & Melbourne could be are heading for their biggest ever house price fall"
That course is set.
Only one thing is uncertain, the magnitude of the fall. Will it abate here at 10%, or push on to ANZ proportions? The answer, however, is unlikely to be 20%.

bw - it will be a minimum fall of no less than 40% from peak to trough .

Falls in Sydney are gathering pace. 1.4% decline last month.

33% correction wipes out a previous 50% gain.

I've seen a few more numbers recently and that suggestion of 40% decline sounds dramatic but it could actually end up being even more than that.

Could never happen here

13
up

Naa won't happen here, we're different, she'll be right mate....

Its not happening here so why is there is any delay in the flow on effect ? Its been on the decline in Aussie for over a year so how do you explain the delay ? Even with Labour doing its best to screw us, property is still holding up.

..because we have a msm and banking industry who relies on the the real estate industry. Together they have continued to spruik property and not reported with any integrity what is going on out there.

So the reason for the delay..continuing public ignorance.

Just as the national party refused to accept there was a housing crisis, people denied there is a housing bubble

The former denial got them in the dog house, those denying the latter will find themselves giving the national party members company in the dog house

Watch those statistics, Greg!

(From Aussie) "Some nice statistical padding in Domain Melb auction results. Domain lists the same property 4 times, 2/508 Elgar Road. The listing also says "Sold 30 November by Private Treaty" and no mention of an auction, so I'm not sure why it is in yesterday’s auction results….."

Yes, some of that appear to be going on here to, one was pointed out in the comments here a couple of weeks ago. If you're being generous it was a simple foul-up and house that wasn't sold listed as sold in the results.. If you are cynical..

When I look at the mortgagee sales in Auckland it looks like people were caught up in some form of madness. Paying $650,000 over the RV a year ago and paying $2.5m for an ordinary old house only for the bank to sell it now is crazy. Especially given that the house was purchased for $1.25m only 4 years ago.

I am wondering what sort of debt timebomb is out there right now with mortgages that are in default, and how many people are stuck paying a mortgage on a house that is underwater. There are going to be a lot of people that are mortgage slaves, and that creates a risk that would be exposed by an economic downturn.

I've got a mate who bought a new build in hellensville for 800k 6 months ago, now the agents are appraising it at high 7s. . This is a matter of just months that his house is worth less than he paid, plus agents fee he's down at least 50k. ..

That's fairly normal for a new build. Strangely new houses are a bit like new cars in this regard as there appears to be a bit of a premium on new build prices. If you bought a new house and then tried to sell it six months later a significant loss should be anticipated even when the market is hot.
Remember - housing is a long term investment.

PP2F, Why is he wanting to sell so soon? Is he an "investor"?

Baby on the way, bit unexpected

I wonder about that $2.5 million purchase, could the following scenario have happened?

Step 1 - 2 people are granted Permanent Residency
Step 2 - Person A buys house for $1.25 Mill ($250k down & borrow $1 million).
Step 3 - Rent it out
Step 4 - Sell it to Person B for $2.5 mill who borrows $2 million
Step 5 - Pocket $3 million less any payments and go home. Leave the bank(s) to sort out the mess.

This is the Augistine Lau special scheme. But who do you borrow the $2.5 Million from, because the banks aren't stupid enough to loan that sort of money, are they?

I guess if they bought a few properties on the side collectively worth say $2 million in cash and leveraged off those. Once those are sold, disappear.

While there are notably few mortgagee sales at the moment I see that several in Auckland are for large sections. There was a bit of a mania for buying large sections over the last couple of years however these sorts of properties are generally heavily geared with rent only partially covering the mortgage interest. The idea is to have them as a land bank.

If developing sections flounders and tax breaks are ring fenced these investments may start looking a little 'average'.

There certainly appears to be a tendency for people bailing out of development opportunities. Lots of properties that are being sold with resource consents and sometimes plans for houses.

https://www.realestate.co.nz/3448371
https://www.realestate.co.nz/3449619
https://www.realestate.co.nz/3450882
https://www.realestate.co.nz/3448151
https://www.realestate.co.nz/3431756
https://www.realestate.co.nz/3426385
https://www.realestate.co.nz/3429248

My favourite example is below - purchased in 2016 for $4.2mio. Now has an RC for 4 x 5 bed houses which equates to a cost of $1.05m per site - you would need an end product value of $2.5mio plus to provide any margin. Would work in a growing market but not now...

Existing houses have been demolished and cleared so not even income to offset the interest cost.... RV is only ~$3.3mio and the site has been on the market for months. You do wonder how long before the Bank comes knocking.

https://www.trademe.co.nz/property/residential/sections-for-sale/auction...

I feel sympathy but this speaks to the ridiculousness this market got to at peak where it was a race to buy anything that presented at any cost.

"A change of circumstance has resulted in the current vendor having to sell. "

Yeah, they realised they can't make money on it, and now seek a bigger muggins to offload it onto.

Particularly like the “With the current shortage of housing the demand for this product will be high, act now!”

Been on the market since June.

This will help the market correct. If the original had developed the price would have included a land cost of $1.05M plus. Now it can be a third or more less. So whoever buys it pays say $300K less which means homes are more affordable and more likely to be built. Win win, just not for the poor guy who overpaid and did the demolition.

Well, Australia gutted their IT industry this week, so news like this no longer makes me happy

Can you elaborate re "gutted their IT industry"?

https://www.theverge.com/2018/12/7/18130806/australia-access-and-assista...

Australian companies cannot be globally competitive with that hanging over them

What about the cloud services?
Microsoft servers delivering cloud here are based in Sydney/Melbourne.

This sounds like Microsoft 365 anything! Outlook, Dynamics, CRM.
the data/detail kept in these business systems is massive

The answer is to not operate an IT business in Australia. Hopefully NZ will benefit from the stupidity of the Australia Government.

I don't think NZ will benefit much at all - Australians have access to an E3 visa to the US and earn a lot more money than they would in Australia, let alone here.

Wishing NZ had an E3 visa scheme really badly right about now :(

Anything with Australian residents working on it is at risk - including open source software that huge companies rely on.

20% bank economist code for 40%?

Exactly.

So ANZ calls it 15-20%. It's already 9.5% in Sydney so I can see their point. To be fair, the Sydney falls to date have been quite well behaved on the whole. Their home prices are way out of kilter with just about everything you can think of so a 15-20% correction over 2-3 years is something most of them can live with. They're Australians, they're supposed to be tough aren't they? Yes, some of them will be under water but that's the price of greed. That's the risk. It's not only the banks who can be accused of being greedy.

back to the future - from 1992
https://trove.nla.gov.au/newspaper/article/126958022

on Westpac
By IAN DAVIS,
Finance Editor
Kerry Packer, Australia's wealthiest businessman, has staged a daring share-market raid to pick up more than 8 per cent of Westpac, Australia's largest bank.
A string of disasters has left Westpac vulnerable to a'share raider and even a possible takeover.
Westpac's problem loans exploded to $9.26 billion. It was forced into massive property writedowns.
The failure of a $ 1.2 billion rights issue which only 27 per cent of shareholders took up, left underwriters with the remaining shares and culminated in the resignation of the company's chairman, Sir Eric Neal, and three other board members.
The company's share price was more than halved from more than $5.50 in early 1990 to $2.51 in early November. It closed at $2.99 yesterday, its highest price since the failed rights issue closed in September.
Strong buying, mainly by Mr Packer, has pushed the share price up 26c this week.

Mr Packer's 8.27 per cent stake in the company has so, far cost him about $230 million, a remarkably
small outlay to give him 8.27 per cent — and considerable influence — over Australia's largest bank, with assets of $ 110.9 billion and Australia's seventh largest company with a market capitalisation of$5.342 billion....

Although Mr Packer is limited by the Banking Act to a maximum 10 per cent in Westpac, by working with Westpac's largest shareholder, the AMP Society, which holds 15 per cent, Mr Packer is likely to put the
bank's management under strong pressure to improve its performance.
The AMP has already warned Westpac to lift its game, managing director Ian Salmon warning a fort
night ago that "senior executives [of Westpac] have been charged with what they have to do. They will do it
in the course of the next six months to 12 months or I guess the board will decide they can't do it and make
alternative arrangements." .......

The Australian context.
(KP was Westpac director for a week).

https://www.independent.co.uk/news/business/westpac-reflects-a-sick-indu...

During the early 1980s, bank loans in Australia increased at about 14 per cent a year. By 1990, they were increasing at 40 per cent. With the onset of the worst recession in 60 years, and a shattering fall in asset and commodity prices, the whole edifice came crashing down. When the dust had settled, bad management and poor loan judgement, particularly in the debt-ridden state banks, were shown to be as much to blame as the economic downturn.

The reason the google indexes for house searches are rising in Oz is because sellers are shitting themselves..

What kind of increase are we talking about?

Lets just get on with the reset.

Just drove around a new realestate sector in hamilton called Greenhill estate and some large local construction firms who snapped up multiple lots at the start for house and land packages are now selling the land. I can only guess low demand or low margin on those houses. GJ Gardener was the builder who has most sections on the market...

Just the section, you reckon, not house and land, must go take wee look myself, Hamilton has been going hammer and tongs expanding, I've been thinking for a while it could be in danger of overshoot. Be interesting to take a drive out to Peacockes, if I am in that area I will go take a look.

Prices in Greenhill park are more affordable than rototuna and Flagstaff because of the smaller sections. GP has easy access to expressway so will always be in demand and hold its value.

What secondary school would Greenhill Park be zoned for?

Probably Fairfield College I expect, but could be due a new one if population growth predictions are anything to go by

Frankly, it looks like a somewhat more eclectic Addisons (Takanini)

This interview is quite amusing. The key is "ANZ in Australia has revised its forecast...". They did not see the bursting of the obvious bubble coming at all, although it has been on the cards for years! The market is sooo out of whack in world terms, and so is NZ. I bet they'll revise down again when it's nearing -20% in Sydney. This is the Head of Australian Economics mind you. Does this remind you of anything? Very few economists saw the GFC coming, including Greenspan. This is supposed to be their job! If any other profession got things so wrong, they'd be out.