What could cause property prices to drop in Sydney and Melbourne as moderate growth predicted: Deloitte

A significant rise in interest rates or a drop in wages will trigger a fall in property prices — putting aside factors such as a major tax reform or reduced population growth — according to a new report.

As the economy is relatively healthy, the more likely situation of the two was a jump in the official interest rate, according to the Deloitte Australian Mortgage Report released on Thursday. This would make home loan repayments more expensive for existing borrowers.

Even then, with low wage growth and inflation, the official interest rate remained at a record low and the Reserve Bank had not signalled any significant rises, the report says. Though interest rates were more likely to rise now compared with a year ago, they were unlikely to increase quickly.

Meanwhile, housing affordability — particularly the pace of the Sydney and Melbourne markets — was expected to be an ongoing concern this year.

Deloitte anticipated more Sydneysiders would move to Melbourne after the recent stamp duty exemption announcement for first-home buyers. This would help to absorb newly built apartments.

House prices are expected to grow at more moderate levels in 2017 than the past few years; with Sydney and Melbourne likely to outperform Brisbane and Perth.

Across the country, total new lending — including refinancing — over the 12 months to December was flat at $384 billion, according to co-author of the Deloitte Australian Mortgage Report financial services partner James Hickey.

The growth of new mortgage lending is tipped to slow to a modest 1 to 5 per cent this year, with leading lenders and mortgage brokers predicting an increasingly personalised, subdued market, dominated by issues of availability and affordability, and international regulation.

Last year was also the first year since 2012 that settlements did not grow. The moderating settlement growth was due to the Australian Prudential Regulatory Authority’s 10 per cent cap on property investor loan growth, more stringent serviceability criteria, greater pricing for risk and more selective lending.

Mr Hickey said in other states and regional areas of New South Wales and Victoria, the affordability issue was not so much about property prices, but rather employment and availability of jobs and certainty of income, which was the concern.

“This creates a dilemma for regulators and policy setters in that any lever to dampen demand in Sydney and Melbourne may have unintended consequences on other capital cities and regional areas,” he said.

There could be a greater release of existing supply if retirees were encouraged to downsize without any adverse impact on their pension eligibility, he added, and give them further incentives by not having to pay stamp duty on their repurchase.

Deloitte Access Economics director Michael Thomas said the housing market story was a population story.

Population growth drove housing demand, and the strength of Australia’s population growth over the decade had fuelled a surge in building, he said.

Australia’s population grew on average at about 220,000 per annum from 1985 to 2005. But Australia’s population growth then stepped up to 360,000 per annum because of stronger migration and a new baby boom, and the average growth rate jumped from 1.2 per cent to 1.6 per annum.

“However, the home building response was tardy. Unmet demand mounted until 2013, when work on 170,000 new homes kicked off,” Mr Thomas said.