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Price free fall rumour is ‘overly pessimistic’, says KPMG

10 January 2019 Tim Neary
KPMG building

Widespread speculation that house prices in Australia’s premier markets are set to go into a free fall is overly pessimistic, according to a new report by KPMG Economics.

The report Housing Affordability: Sydney and Melbourne housing market update has found that Sydney and Melbourne house prices will continue to fall further this financial year, before plateauing and then recovering over the following two years.

This is an update to a major study by KPMG Economics released in June 2017.

While there will continue to be price declines in the near term, KPMG expects prices to bottom out in Australia’s two major cities in calendar year 2019. The market will then start to see price growth again in Melbourne during 2020 and Sydney in 2021.

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The report reiterates KPMG’s view that there is a long-run relationship between house prices and a batch of variable “push and pull” factors relating to the stock of dwellings, population and borrowing by residential property investors.

KPMG chief economist Brendan Rynne said that despite short-term dislocation, prices tend to revert back to the equilibrium suggested by the long-run relationship over time.

“Our housing update shows that the tougher regulatory actions and taxation measures by both federal and state governments we identified last year have had a significant effect,” he said.

“There has been a falling away in foreign interest, notably from China, and lending to domestic buyers has got stricter, while housing supply has increased. This is why prices have declined — but we believe that process will reach its peak over the next few months and then go into reverse later this year.”

Correct

Mr Rynne said that KPMG’s earlier presumptions have been accurate.

“In our 2017 paper, KPMG assessed that by the end of FY2016, house prices in Sydney were more overvalued in relation to their ‘fair value’ compared to Melbourne, and therefore they were expected to fall by a greater extent. That has proved to be the case.

“Two years on, a relatively high level of increases in the stock of residential dwellings in both Sydney and Melbourne, a decline in financing for housing investors, and the tightening in APRA lending standards have all combined to drag house prices downwards.

“But what we have also found is that dwelling prices in Sydney are much more sensitive to the demand created by domestic investors than dwelling prices in Melbourne. It is predominately this factor that is causing the difference in expected dwelling price growth between the two markets.”

One element that is different to KPMG’s previous report is the explicit inclusion of the number of foreign students studying in Australia.

On the basis that most foreign students would return to their home country for the extended summer break, and possibly for the mid-year break, their stay in Australia over a 16-month period is likely to be 10 to 11 months, and therefore they would be excluded from the ABS estimated resident population statistics.

“With now more 800,000 foreign students studying at higher education, vocational education, schools and ELICOS institutions in Australia, and even adopting a higher occupancy rate than the average per dwelling, the accommodation demand for foreign students would have been around 87,300 dwellings in Sydney and 78,500 dwellings in Melbourne in 2018,” Mr Rynne said. 

KPMG estimates that in 2000, around 10 per cent of the additional dwellings in the market were required to accommodate foreign students. However, in 2018, this had increased to around 30 per cent in New South Wales and around 25 per cent in Victoria. 

KPMG’s analysis also found that:

• Tighter prudential controls implemented by regulator APRA in recent years have helped to slow residential price growth. These new rules have seen investor lending fall from 39.2 per cent in the June quarter 2017 to 32.6 per cent in the September quarter 2018.

• In NSW, 126,600 dwellings were completed during the last two years, an increase of nearly 27,500 over FY15 and FY16. For Victoria, the dwelling completions were 130,700.

• There has been a sharp decline in the number of resi properties bought by foreigners. According to Foreign Investment Review Board (FIRB) data, foreigners bought just under 13,200 residential properties in Australia during 2016–17, significantly down from 40,100 in the previous financial year.

Price free fall rumour is ‘overly pessimistic’, says KPMG
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