Property's slippery slide

PORTFOLIO POINT: Without government intervention, Melbourne and Sydney could be worst hit by the correction, which could continue into next year.

House prices across Melbourne and Sydney are likely to fall between 6% and 7% before the end of the calendar year and may continue to fall well into 2012, according to property veteran Louis Christopher.

But for Christopher, this isn’t all bad news. As the managing director of the independent property advisory and forecasting research house SQM Research, he frequently compiles lists of the most heavily discounted properties in Australia, complete with the number of days on the market and a link to the website advertising the property.

The list is revealing on a number of levels. The most heavily discounted property is an apartment with ocean views across the road from the beach in the Perth suburb of Coogee. With an asking price about 41% below the original, it is proof that not even the “two-speed economy” can help you if you’ve made a poor investment decision.

Other remarkable knockdown property prices can be seen in the table below.

Source: SQM Research

Like many analysts, Christopher believes property prices are exceedingly sensitive to interest rates and that prices will continue to fall unless we see a cut in interest rates or more government intervention along the lines of the First-Home Owners Boost.

Without that, he says, some home owners could be looking at corrections as much as 10%. Eureka Report spoke to Christopher to find out more about his views on particular markets and where he thinks the bottom is.

The interview

Eureka Report: What sort of correction are you anticipating in property prices?

Louis Christopher: An as average over the capital cities, it’s looking like it’s going to be a correction of at least 5% this year. We think the market will not bottom out until we see either a cut in interest rates or some type of government intervention, such as the First-Home Owners’ Boost being reintroduced.

And if neither of these events take place?

Then it’s very likely the market will continue to fall throughout the course of this year and into late next year, until it eventually levels out if rates don’t change. Then we’ll probably be in for a long period of stagnation.

What do you think it would take for the government to intervene?

If the property market sees a correction of a reasonable magnitude – if we start getting up to say an 8, 9, 10% drop in house prices – I think the federal government might feel compelled to come in again and try and stop that, as they did in late 2008 with the First Home Owners’ Boost. So in looking at the current situation I suspect that if the declines start becoming more serious than they are now, the government will probably do the same thing again.

Which regions have been hit the hardest in terms of property prices?

The Australian Bureau of Statistics (ABS) data suggests that the biggest price declines are occurring in southeast Queensland and in Perth. Property prices in Brisbane are also suffering, according to both the ABS and RP Data (for more on Brisbane property prices, click here). Perth and then Melbourne are not far behind.

Which areas are you seeing as the most resilient to falling property prices, and what do you suspect is the reason for that?

Canberra and Hobart are by far the most resilient. I suspect it’s got to do with fair market valuation more than anything else. We like to look at house prices versus nominal GDP and the growth rate over a period of time.

The theory is that house price growth should not be growing much faster than your total income growth; if it is, it means additional debt has to be taken out and serviceability of that debt is deteriorating. That sort of growth can only happen for so long and we’ve noticed in the past that once the difference between house price-to-income growth gets too great, it starts to narrow again.

For example, in Perth house prices had a 70% premium above normal GDP back in 2007. That’s come all the way back down to a premium of about 30% – still a bit too high for us – but it just shows you that it can adjust. When I look at prices in Canberra and Hobart, they’re both at nominal GDP and to us that implies that they’re actually reasonably valued.

When I look at other items, such as advertised housing stock for those two cities, we’re not seeing that explosive rise in stock levels or supply as we have seen in other capital cities such as Brisbane or Perth.

What do you see happening in our largest capital cities, Sydney and Melbourne?

We’re a little bit more optimistic in Sydney. We still think there’ll be a decline in house prices but it’s going to be fairly moderate because rental vacancy rates and the local economy are holding up reasonably well. Rental vacancy rates are very tight at below 2% and there hasn’t been any overbuild. In fact, building approvals have actually been nearly at 30-year lows in New South Wales. We think it’s likely to record some modest price falls, but it’s not likely to be a full-blown massive correction.

Melbourne we’re not as optimistic as we are with Sydney. We’re recording massive increases in stock levels coming on the market across Melbourne and we think that a 5% correction is already in the bag – it’s happening as we speak – with the possibility that the decline will get up to 6–7% as the year draws to a close.

Houses versus apartments: which is holding up better?

There’s no great difference between the two. There are certain areas where there’s a glut of apartments, such as on the Gold Coast, the Sunshine Coast and a little bit in inner-Melbourne, but overall there’s not much difference between the downturn in sales and prices of houses versus apartments, probably because we haven’t seen a major glut of new apartments nationwide occur.

Will a long-term commodities boom save house prices?

Perth is a classic example where the commodities boom pushed up property prices between 2002 and 2007. Then a property downturn started, even before the global financial crisis began, and from what we can see the reason was that house prices became so unaffordable – because of the huge rise – that even a slight rise in interest rates, as we had in 2007, created a downturn. It implied that even while they were having a commodities boom it was affordability – the level of interest rates and the cost of debt – that had a greater bearing on that market.

Of course, there are some exceptions to this rule. For example, in Karratha it doesn’t matter what interest rates are doing because there’s so much money being pumped into that town that you have a situation now where rents in caravan parks are $2400 a week, and a standard four-bedroom house in a mining town costs over $1 million. But the rest of us are just not seeing that. The multiplier effect that one would expect from the commodities boom is not filtering that much through to the rest of the economy.

Louis Christopher is the managing director of SQM Research. To subscribe to his free weekly newsletter click here.