Wednesday, 21st November 2019
By Victor Kumar
New research has suggested that Sydney and Melbourne will return to double-digit property price growth next year.
While some people’s reaction to the SQM Research forecast might be surprise, I believe it is correct because it is what I am seeing on the ground already.
The research, released last week, said that most of Australia’s capital cities will benefit from the interest rate cuts and loosening of credit restrictions to record dwelling price rises over 2020 with Sydney and Melbourne leading the charge.
Christopher’s Housing Boom and Bust Report 2020 even predicted potential price growth for each capital city with Melbourne leading the way.
The report suggested price growth of 11 per cent to 15 per cent in Melbourne if the current market conditions remain.
However, a secondary scenario was dwelling price rises of 12 per cent to 17 per cent if the cash rate is reduced to 0.5 per cent, we have a stable economy, and there is no APRA intervention.
In Sydney, the forecast was 10 per cent to 14 per cent or up to 11 per cent to 16 per cent for both scenarios.
Markets firming already
The Melbourne and Sydney markets have already started to firm, mostly on the back of the relaxation in lending criteria.
The peak of the Sydney market was late 2017, however, that turn of events was artificially created via APRA’s intervention, as well as restricted access to credit.
The situation was the same in Melbourne, but perhaps less pronounced.
Before the APRA intervention, there was momentum in both markets, with demand from buyers strong and supply low.
So, if these handbrakes hadn’t been applied, the market cycle would still have had some time to run.
However, as soon as the credit restrictions and changes to lending serviceability calculations came into play, the number of people who were able to secure finance plummeted, which ultimately brought the market to a metaphorical screaming halt.
Now, of course, lending has returned to a more reasonable state of play, so that pent-up demand has returned once more.
Demand to remain high
I believe these markets will be driven by first home buyers next year, because prices have dropped, and they don’t want to miss the boat a second time around.
The government’s first home deposit scheme also comes into effect at the start of next year, which will help many with their deposits.
However, demand in Sydney and Melbourne will always be solid, because these cities are home to about 40 per cent of our nation’s population.
For the past year or two, though, a huge proportion of residents couldn’t access finance to buy or invest in their home cities.
On top of that, these markets are likely to keep firming because of the number of major infrastructure projects under way.
On top of this, are the decentralisation plans that will see new major economic hubs and employment nodes created.
Not only will these dramatically reduce commuting times, they will underpin property markets in these locations.
The creation of new employment hubs, in particular, is also driving an evolution in housing design and planning.
In Sydney’s southwest, for example, there is a developer who is trialling the creation of small lot dwellings to help keep prices low.
Likewise, Werribee in Melbourne is set to become the major employment district for Victoria, which in turn will create new communities with more affordable property prices.
Prices are already starting to increase, with some Sydney properties now selling for $100,000 more than they were at the start of this year.
That said, their current price point remains below what it was during the market peak.
So, next year, Melbourne and Sydney prices will rise, but part of that growth will be clawing back the recent losses.
After that, though, price growth will be because of favourable market conditions.
However, our economy must remain stable, interest rates must remain low, and APRA must not intervene again – because it misunderstands the mechanisms of normal market cycles – for that to happen.
Finally, I believe if the recovery continues to materialise, there won’t be future rate cuts because they have clearly served their purpose of kickstarting our two biggest property markets as well as the economy generally.