House prices in the eastern capitals to decline

by YIP03 Jul 2017
Sydney’s house prices will experience a greater adjustment than Melbourne’s in the coming years, predicts a new report from KPMG Economics.

Entitled Housing affordability: What’s driving house prices in Sydney and Melbourne?, the report said that median house prices in Sydney are overvalued by 14% and in Melbourne by 8%, but will decline gradually rather than sharply over the next few years,

Sydney’s median house prices are forecast to peak at $980,000 in 2019, up from $880,000 in June 2016. Median house prices are then forecast to roll back to between $930,000 and $950,000 by the end of the 2021 financial year.

In contrast, Melbourne’s median house prices are expected to peak in 2018, pause for a year or two, and then start to grow again.

Melbourne’s median house prices are expected to rise to between $720,000 and $740,000 by the end of 2019, a significant increase from about $650,000 in 2016. After plateauing, they will again gain momentum and grow to between $775,000 and $825,000 by the end of 2021.  
“Our forecasts show Sydney will experience a greater adjustment than Melbourne in the next few years, but this is likely to be gradual rather than a collapse in the median dwelling price,” said Brendan Rynne, KPMG’s chief economist. “Whether or not the current Sydney and Melbourne housing prices constitute a ‘bubble’ is a matter for debate, but we estimate that short-term factors have pushed median dwelling prices above their long-term ‘equilibrium’ prices by about 14% and 8% respectively.”

Rynne pointed out that price surges have happened before, with prices returning to equilibrium without the sort of crash that was witnessed in other countries after the GFC.

“We expect the same again to happen here now. We anticipate a cooling in price growth, and from next year prices will start to gradually come down. While prices are high now, they are still within known boundaries by historic standards,” Rynne said.

The report also argued that Sydney’s house prices have become more volatile since the GFC even though there hasn’t been the same volatility in supply, demand, and costs.