• Australian capital city home prices have now fallen for five consecutive months.
• The national slowdown largely reflects weakness in Sydney and Melbourne.
• AMP Capital expects prices in Sydney and Melbourne to fall by a further 5% this year.

After a strong rebound in late 2016 and throughout much of 2017, coinciding with a reduction in official interest rates from the Reserve Bank of Australia (RBA), Australian house price growth has slowed rapidly in recent months.

According to CoreLogic, prices across Australia’s capitals fell for a fifth consecutive month in March in average weighted terms, leaving the increase from a year earlier at just 0.8%, well below the recent cyclical peak of 11.4% struck in May 2017.

To Shane Oliver, head of investment strategy and chief economist at AMP Capital, the recent Sydney-led national slowdown, coupled with weaker auction clearance rates and moderation in housing finance to investors, all points to a distinct shift in buyer mentality across Australia’s broader housing market, especially in Sydney and Melbourne.

“FOMO, or fear of missing out, looks dead for now,” said Oliver following the release of CoreLogic’s hedonic home value index for March released today.

“The combination of reduced lending to investors and interest only borrowers following pressure on the banks last year from APRA to tighten lending standards along with tougher restrictions on foreign buyers, rising supply and more realistic price expectations by buyers are all clearly working to slow the previously booming Sydney and Melbourne residential property markets.”

Oliver says tighter restrictions on interest-only mortgage lending introduced by Australia’s banking regulator, APRA, in March last year are largely behind the moderation in Australia’s largest and most expensive markets, noting they are “having a far more sustained affect this time around” compared to when initial measures to curb credit growth to investors were introduced back in late 2014.

“Auction clearances rates so far this year have seen none of the rebound that they saw in early 2016 after the initial APRA tightening,” he says.

And he expects that trend will continue for some time yet, suggesting that APRA will continue to tighten lending standards as growth in household debt continues to outpace that in household incomes.

“Our assessment is that a further tightening in lending standards as banks get tougher on borrower income and living expense levels along with the ongoing rise in supply and more realistic capital growth expectations by home buyers will see Sydney and Melbourne property prices fall another 5% or so this year,” he says.

While that suggests a recent moderation in the scale of declines seen in Sydney and Melbourne may reverse in the months ahead, Oliver says it’s unlikely to herald the start of a house price crash.

“With population growth remaining strong a property crash remains unlikely in the absence of much higher interest rates, much higher unemployment or a continuing surge in supply,” he says, noting that a sharp increase in unemployment and interest rates, in particular, appears unlikely.

Outside of Sydney and Melbourne, Oliver says home prices in Perth and Darwin are either “at or close to the bottom” while price growth in Adelaide, Brisbane and Canberra is “likely to be moderate”.

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