Australian Property Price Forecasts 2019-2020

Introduction and key findings

After a tumultuous 12 months for Australia’s property markets, 2019 looks likely to be a year of greater stability. That’s not to say prices won’t fall further, but the pace of those falls will slow in the first half of 2019 before we move into another moderate growth phase.

We expect that Sydney and Melbourne will be two of the weakest markets in 2019 and then forecast prices to grow at about 4% in 2020. Brisbane, Perth, Adelaide and Canberra will see modest house price growth over the next couple of years and Hobart house prices should stabilise after rapid growth in recent years.

We expect the falls experienced by Sydney and Melbourne over the 2017-2019 period will prove to be the largest since the late 1980's. But it’s worth remembering these falls have come on the back of an extraordinary period of rapid growth.

Investor caution, tighter bank lending practices, weak sentiment and new housing supply weighed on prices in 2018 and will continue to push prices lower over the next few months. But we expect things to turn around slowly in 2019. Banks and potential borrowers should adjust to new tighter lending standards, with lending growth to resume but at a more moderate pace. Also supporting house prices will be projected strong (albeit slowing) population growth, lower unemployment, faster wage growth and increasing first-home-buyer activity.

A number of factors could result in prices deviating from the forecasts (which are based on the most likely future scenario). The major downside risks include: mortgage rates rising earlier and faster than expected, banks tightening lending even further, slower population growth, forced selling by investors and a slowdown in the Chinese economy. On the other hand, a possible slowdown in housing construction, government intervention to support the market and a stronger economy could mean price growth is stronger than we forecast. The impact of the Labor Party’s proposed changes to negative gearing is more uncertain. The reform will likely push prices lower eventually but may actually support prices in the next 6-18 months.

Australia’s property market: the story so far

Australia’s property market changed gear over the past 12-18 months following years of strong price growth. After Sydney house prices grew by 85% between 2012 and 2017, prices began falling in 2017; Melbourne house prices started to fall in early 2018 after a 70% increase since 2012. As of September 2018, Australia’s combined capital city median house price was 5 per cent below its 2017 peak, and unit prices were down 3 per cent. Prices have fallen further in recent months. National price falls have been driven by falling house prices in Australia’s two biggest cities, Sydney and Melbourne. House prices are currently 8 per cent below their peak in Sydney and 6% off their peak in Melbourne.

Tighter lending conditions have been a major contributor to the price declines. In response to APRA’s 2017 intervention to slow investor lending, banks wound back interest-only lending and increased interest rates. In 2018, banks tightened their expense and income verification of potential borrowers and have also became more cautious due to the spotlight of the Royal Commission. In addition, investors began withdrawing from the Sydney and Melbourne markets as sentiment turned and investors saw poor prospects for capital gains. This led to new investor lending falling dramatically, particularly in NSW and Victoria.

But it’s not only tighter lending conditions that have contributed to falling prices. Confidence and momentum, which have a big impact on the property market, turned around in late 2017. Falling sentiment has a reinforcing effect on prices: as prices fall, buyers become more hesitant, further pushing down prices. The ‘froth’ in some parts of the Sydney and Melbourne markets in 2017 dissipated in 2018. Another factor at play is that lots of new housing hit the market after a high rate of new construction in the previous couple of years. In NSW and Victoria dwelling completions in 2016-17 and 2017-18 were at or close to record highs. Looking forward, the pipeline of construction remains at a high level (although is dropping off), suggesting new housing construction should continue to weigh on price growth.

Australia and capital cities house and unit price forecasts

We have forecast median house and unit prices for Australia and most capital cities to the end of 2020. Economic modelling, analysis of market-leading indicators and recent market trends have been used to produce our forecasts. The forecasts are based on the most likely future scenario (see below for details on which events could push prices higher or lower). House and unit price forecasts are based on Domain Group’s stratified median price series. Of course, a degree of uncertainty is associated with any forecast. 

Forecast variables used in our economic modelling, such as population and interest rates, are derived from the RBA’s forecasts, Australian and State Treasury forecasts, and other sources. These sources generally predict trend economic growth, moderately strong population growth in line with recent trends, one cash rate increase in early 2020 and flat or declining unemployment rates. We forecast that the value of home loan approvals (to investors and owner-occupiers) is expected to grow at a modest pace in 2019 and 2020.

Australia (combined capitals)

We expect house prices to keep falling in the first half of 2019 before turning around and growing modestly, resulting in annual growth of about 1 per cent over the year to December 2019 (see graphs below). House price growth is then expected to increase to 4 per cent over the year to December 2020. This is a predicted fall of 7% from the 2017 price peak of $820,000 to a low of about $760,000 in mid-2019. At this low point, Australian house prices will be back at their 2016 level. 

Leading indicators of prices, such as low clearance rates, falling home loan approvals and a rising stock of listings suggest prices will continue to fall in the months ahead, with Australian house prices expected to fall by about 6 per cent over the year to December 2018.

Australian unit prices are anticipated to grow by 2% in 2019 and 3% in 2020. Unit prices are expected to bottom out in early 2019 after falling by 3% over the year to December 2018. They are predicted to fall by approximately 5% from their peak of $568,000 in June 2017. At this low point of about $540,000, unit prices will be back at their late 2016 level.

We expect unit prices to be more resilient than house prices for two main reasons. First, there was a smaller run-up in unit prices in the boom period, so there is less market ‘froth’ to dissipate over the 2017-2019 period. Second, state government stamp duty concessions will hold up unit prices, particularly in Sydney and Melbourne.

Solid population growth, low unemployment and low interest rates will underpin Australian property price growth in the medium term. More restrictive lending conditions will continue to weigh on prices in the immediate future. But eventually, borrowers will begin to adjust to this new normal (including having a better understanding of how much they can borrow and how long it takes to secure a loan) and lending will begin to grow again, although at a modest pace.

Sydney

We forecast that Sydney house prices will be close to unchanged in the year to December 2019 after falling by about 8% in 2018. We then expect prices to grow modestly in 2020. House prices are predicted to fall by about 12% from their peak of almost $1.2 million in June 2017 to a predicted low point of just above $1 million in mid-2019. At this low point, Sydney house prices will be back at their mid-2016 level.

Sydney unit prices are expected to be more resilient than house prices. Unit prices are expected to fall by about 3% over the year to December 2018, but then prices are expected to grow modestly over the next two years at about 3-5%. Sydney unit prices are predicted to fall by 6% from their peak of $769,000 in June 2017 to their lowest point of about $720,000. At this low point, Sydney unit prices will be back at their late-2016 level. 

The NSW government’s stamp duty concessions are also likely to support unit price growth. However, one major downside risk to Sydney unit prices is whether the large pipeline of new unit construction is absorbed. Given projected strong population growth, we think this will not result in city-wide price falls, although some areas with a particularly large amount of new construction may see prices remain weak.

Tighter lending conditions have weighed heavily on Sydney property prices, particularly for more expensive properties, but we think this is likely to have played out by mid-2019. Low unemployment will also support prices, with the NSW unemployment rate forecast to be 4.75% through to 2020 (and could potentially fall to a lower level). Another supporting factor is NSW’s population growth, which is expected to remain at around 1.5%.

Melbourne

We expect Melbourne house prices to decline by about 1 per cent in 2019 after a 9% fall in 2018. We then forecast that Melbourne house prices will rise by about 4% in 2020. They are predicted to fall by about 11% from a peak of $910,000 in December 2017 to their lowest point of about $800,000 in mid-2019. At this low point, Melbourne house prices will be back at their late 2016 level.

Melbourne unit prices are expected to fall by about 1-2% in 2018, and then prices are expected to grow by about 1% in 2019 and 2020. Melbourne unit prices are predicted to fall by about 3% from their peak of $507,000 in March 2017 to their lowest point of about $490,000.

As in other capitals, tighter lending conditions and weak sentiment will weigh on Melbourne property prices in 2019. But Victoria’s unemployment rate is falling and Melbourne’s population growth is expected to remain very strong, with annual growth remaining above 2% over the next few years. This will help to absorb the large pipeline of new housing supply expected to hit the market over the next couple of years.

Brisbane

We forecast Brisbane house prices will increase by 4% in 2019 after not changing over the year to December 2018. We then expect prices to grow by about 5% in 2020. After modest price growth in recent years, we expect that Brisbane houses will grow faster than most other markets over the next couple of years.

Brisbane unit prices are expected to grow by about 3 per cent in 2019 and 2020 after falling by about 6% in 2018. Brisbane unit prices are predicted to bottom out in late 2018 or early 2019 after falling about 9% from their peak of $411,000 in 2016.

Our forecast for relatively strong house price growth in Brisbane is underpinned by a pick-up in population growth and declining unemployment. In addition, relatively affordable housing compared to Sydney and Melbourne will continue to attract new residents and investors. Brisbane unit price growth will be held down in the near-term by a large pipeline of new units that have come onto the market. However, new construction is now declining so the supply of new units is forecast to drop, which should support price growth in 2019 and 2020.

Perth

We expect Perth house prices to fall about 5% in 2018, but then to grow by 5% in 2019 and 3% in 2020. We forecast that Perth house prices will bottom out in late 2018/early 2019, after falling by 13% from their peak of $616,000 reached in late 2014. We expect that Perth house prices will grow faster than most other markets in 2019 and 2020 after falling in recent years.

Perth unit prices are expected to fall by about 6% in 2018, and then prices are expected to grow by about 2% in 2019 and 2020.

Perth property prices have fallen for a number of years following the end of the second stage of the mining boom. Our outlook is for prices to turn around and to grow modestly for the next couple of years. This outlook is underpinned by better economic conditions: new mines are being built, commodity prices are higher, population growth is increasing and employment prospects have improved. However, not all signs are positive, with home-loan approvals continuing to trend downwards, market sentiment still weak and tighter lending conditions weighing on prices.

Adelaide

We expect Adelaide house prices to increase by 2% in 2018 and then to grow by about 2% in each of the next two years. This modest growth follows slow but steady growth over the past few years.

We forecast that Adelaide unit prices will fall slightly in 2018 and then grow by about 2% in 2019 and 2020. Adelaide’s slow and steady property price growth will continue, driven by slow population growth and slowing employment growth.

Hobart

We forecast that Hobart house prices will grow by about 12% in 2018, the fastest growth of all capital cities. We then expect prices to grow by about 2 % over the next two years.

Our unit price forecasts are more uncertain (due to volatile unit price data), but we expect prices to be fairly stable in 2019 and then grow modestly in 2020.At the end of 2018, Hobart house prices will be 40% higher than at the start of 2016. We predict that Hobart price growth will slow as mainland capital city markets become relatively better value and new housing construction catches up to the strong growth in demand.

Canberra

We expect Canberra house prices to grow by about 2% in 2018 and then to increase by 4% in each of the next two years. This forecast price growth follows consistent price growth in the past few years.

Our unit price forecasts for Canberra are more uncertain due to more volatile price data, but we expect prices to grow at a slower pace than houses, mainly due to higher rates of new apartment developments. As has been the case in recent years, low unemployment and strong population growth of 1.75% per year underpin our forecast for continued property price appreciation in Canberra.

Events that could impact property price forecasts

Domain’s forecasts are based on our base case scenario, which is what we think is most likely to play out over the next couple of years. But there are numerous events or risks, ranging from possible to unlikely, which could result in price growth being higher or lower than expected. The main risks to the property price outlook are described below.

Downside risks to property prices

Mortgage rates rise earlier or by more than expected

Most economists expect the RBA to leave the cash rate unchanged at 1.5% until at least 2019 or early 2020. The financial markets also expect the cash rates to remain unchanged: the ASX Cash Rate Futures Implied Yield Curve predicts one 25-basis-point rise in the first half of 2020 (this expectation is included in the forecasts).

But there is the possibility that mortgage rates could increase earlier due to banks passing on higher funding costs as global interest rates rise (a small mortgage rate rise due to higher funding costs happened in September 2018 and could happen again).

There is also the possibility that the RBA increases the cash rate earlier than market expectations. The RBA’s latest Statement on Monetary Policy contained forecasts that were more optimistic than many economists expected and public announcements indicate the bank would like to raise rates at some point.

Our modelling predicts that if mortgage rates increased by 0.5 percentage points in 2019 then Australian house price growth would be about 1 percentage point lower in 2020 (all else being equal).

APRA and banks tighten home-loan lending further

APRA implemented a number of macroprudential measures over the 2014-2018 period aimed at curbing excessive or imprudent lending, particularly around interest-only loans to investors. Also over this period, APRA has progressively tightened home-loan lending standards. In 2018, APRA encouraged banks to scrutinise income and expenses more closely, and banks also lent more cautiously in response to the public spotlight on lending practices because of the Royal Commission into the banking sector.

We forecast that the value of new financing commitments will grow slowly in all states and territories from 2019, after falling in most areas in 2018. However, there is the possibility that the Royal Commission’s findings will result in banks further tightening lending criteria. Banks are also introducing comprehensive credit reporting, which allows third-parties to check on a borrower’s overall financial situation when assessing a loan application. These changes have the potential to slow housing finance growth further, which would weigh on property prices. Tighter lending conditions may also weigh on new housing construction, which may feed into lower employment rates among construction workers (about 10% of workers are employed in the construction industry).

A large proportion of property investors switching from interest-only loans to principal-and-interest-only loans are unable to meet higher repayments and forced to sell

Many investors currently with an interest-only loan will be forced to switch to a principal and interest (P&I) loan over the next couple of years. The RBA predicts that most switching will occur in 2019 and 2020. Investors who are forced onto a principal and interest loan face repayments 40-50% higher than under an interest-only loan.

The RBA believes the number of investors who will not be able to meet the higher repayments will be small, and that this transition will continue to occur in an orderly fashion. The RBA has previously stated that while some borrowers have struggled to meet higher repayments after switching to a P&I loan, many have adjusted to these higher repayments within a year. The RBA also recently stated that this process hasn’t materially pushed up arrears rates. Many investors have already voluntarily switched to P&I loans earlier than when their interest-only term expired (to take advantage of the much lower interest rates on P&I loans).

Nonetheless, there is still a risk that more investors than expected will not be able to afford higher P&I repayments and will instead be forced to sell. If this happens in large enough numbers, the increase in listings will weigh on prices, particularly in areas with a high concentration of investors (notably inner-city Sydney, Melbourne and Brisbane).

Population growth is lower than forecast due to the government reducing immigration

The federal government is considering reducing Australia’s permanent migrant intake in the coming years. Over the past decade or so, overseas migration has been the major driver of population growth. Cutting the permanent migrant intake could slow population growth (although temporary migration, which includes students and many skilled workers, is also a significant driver of population growth in the short-run).

If the government’s proposal results in Australia’s population growth being lower than forecast, this will weigh on property price growth. According to our modelling, if annual population growth is 1.2%, rather than 1.5% as forecast, Australian house prices will grow at closer to 2% in 2020 rather than the forecast 4%.

A China slowdown, caused by a US-China trade war or a financial crisis, causes an economic slowdown in Australia

One of the biggest threats to the Australian property market is an economic slowdown in China, our biggest trading partner, caused by an escalating trade war between the US and China, a financial crisis or a property market slowdown.

A trade war would reduce Chinese demand for our exports, particularly commodities such as iron ore. A trade war may impact global growth and global supply chains by slowing trade and pushing up prices, as well as affecting US-Australia trade and battering global confidence. Earlier this year the RBA modelled that a large-scale trade war would increase Australia’s unemployment rate and lower economic growth, and it would likely weigh on property prices.

Rising financial risks from higher leverage and the growth of shadow banking could also trigger a slowdown in China. A property market downturn, possibly from over-building in smaller cities, would also slow Chinese economic growth. Slower Chinese growth would slow Australia’s economic growth and would likely impact the property market.

However, if China’s economy did slow by more than was expected, a lower exchange rate and a lower cash rate rate would help to insulate Australia’s economy and may potentially shield Australia’s property market from a major downturn.

Upside risks to property prices

Housing construction slows faster than expected

Housing construction has been at record-high levels in recent years predominately due to a large number of apartments and units being built in Sydney, Melbourne and Brisbane. This new supply has weighed on price growth and rents. There is also a large amount of work in the pipeline, although recent forecasts suggest that new housing construction will fall from 2020-21.

There is also a possibility that some approved projects may be abandoned or delayed if investors struggle to obtain finance or sell enough units prior to construction. If these delays and abandonments occur in significant enough numbers, and as a result the construction pipeline is lower than expected, this would provide an upside risk to property prices. But working in the other direction, a slowdown in construction may push up the unemployment rate, which would weigh on property price growth.  

Government intervention to support the property market

If price declines continue governments may introduce policies to support property prices, as has occurred in the past (for example, after the Global Financial Crisis when the First Home Buyer Grant was introduced). These policies could include first-home-buyer grants, stamp-duty concessions, or a reduction in taxes and charges on foreign investors (at both state and federal government level).

Sentiment improves on the back of a growing economy

If the RBA’s optimistic economic forecasts eventuate (the unemployment rate falling to 4.75% in 2020, GDP growth remaining at 3% and wage growth increases closer to 3%), the negative sentiment that is contributing to falling property prices may turn around faster than expected and result in faster property price growth in 2019 and 2020.

Risks to property prices with an uncertain outcome

The Labor Party wins the 2018 Federal election and implements its negative gearing and capital gains tax policies

The Labor Party intends to limit negative gearing to new properties and reduce the capital gains tax (CGT) discount from 50% to 25% on all investments if it wins government (with all existing negatively geared properties ‘grandfathered’). A federal election is expected in May 2018 and Labor is ahead in current opinion polls, so there is a good chance this policy will be introduced, although the ALP is yet to confirm a start date. But given a likely May election, it will be difficult to legislate this policy for a 1 July 2019 start, so we expect the policy will be introduced in July 2020.

Property prices will most likely fall in response to this policy change as fewer investors will be wanting to invest in established residential property. Estimates of price falls from similar changes proposed by the ALP vary from 2% to a much larger impact, with bigger falls more likely in areas with a large number of investors.

But when these predicted price falls will occur is uncertain. If the ALP brings in the policy in 2019, it is likely prices will fall in 2019-20 as fewer investors compete for established dwellings. But there is also the possibility that if the ALP proposes a start date of 1 July 2020, this may bring forward some investor demand to take advantage of the grandfathering proposal, and actually push up prices in 2019 and early 2020, with prices being pushed down by the new policy in 2020-21.

Another complicating factor is that there is also the possibility that this policy has been at least partly ‘priced-in’ by investors as an ALP election victory is likely (according to betting markets and opinion polls). If this is the case, when the ALP’s policy is introduced it will have only minimal impact on prices as investors will have already factored in the lower prices when considering any property investment decision over the 2017 to 2019 period.

How the forecasts were constructed

Property price forecasts for the end of 2019 and 2020 were based on the output of an “error-correction model” (ECM) developed by Domain (which was based on other models such as ANZ (2018) and Drought and McDonald (2011)). An ECM is commonly used to forecast property prices, and is based on the theory that property prices have a fundamental value based on certain variables. In our model the change in the property price for a region is based on the population and the mortgage rate. In addition, an ECM also accounts for short-run movements away from this fundamental price. The short-run variables included in the ECM were some or all of the following variables for different cities and dwelling types: the mortgage rate (the combined investor and owner-occupier discounted mortgage rate published by the RBA), gross domestic product, state final demand, unemployment rate, underutilisation rate, the value of home-loan approvals (owner occupier and investor), and property price growth in previous periods (to capture market ‘momentum’ or ‘sentiment’).

The ECM was modelled over the period from the late 1990s and early 2000s to the September quarter of 2018 (the starting point differed due to data availability and the statistical significance of variables).

Forecasts for input variables used in our economic modelling, such as population and interest rates, are mostly from RBA and Australian and State Treasury forecasts. These sources generally predict trend economic growth, moderately strong population growth in line with recent trends, one cash rate increase in early 2020 and flat or declining unemployment rates. We forecast that the value of home-loan approvals (to investors and owner-occupiers) is expected to grow modestly in 2019 and 2020.

We analysed a range of leading indicators of property prices to feed into our forecast for the December 2018 and March 2019 quarters, including: auction clearance rates; housing finance growth; change in the growth of the stock of the RBA’s measure of outstanding housing credit (the ‘momentum’ in housing credit, change in property prices in preceding quarters, monthly price data, the sales-new listing ratio, trends in vendor discounting and days on market (for private treaty sales); property ‘views’ data from Domain’s website and apps.

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Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan. Originally sourced from A report by Trent Wiltshire, Domain Economist.