For many in the housing sector, recent data has not been encouraging.

On January 4, figures released by CoreLogic showed that average house and apartment prices across Australia dropped by 2.3 percent in the December quarter – the largest quarterly decline since the September quarter of 2008. Throughout the year, average prices dropped 4.9 percent. Those in Sydney and Melbourne fell 8.9 percent and 7.0 percent respectively.

Following this, on January 9, ABS building approvals data showed that on a seasonally adjusted basis, the number of dwellings approved for construction (15,465) throughout November was down nine percent on the previous month and was at the lowest level on record in more than five years.

One day later, a survey involving more than 1,000 respondents showed property industry confidence at five year lows.

Next, data released by Housing Industry Association on January 18 showed sales of new homes at six year lows and down on a quarterly basis compared with the same period in 2017 to the tune of 15 percent.

Finally, further data from CoreLogic on January 21 showed December quarter auction clearance rates at just 43.6 percent – down from 53.6 percent over the previous quarter and 62.3 percent over the same period one year earlier.

Not surprisingly, therefore, recent headlines have been gloomy.

To be sure, all this must be put into perspective. At $612,737, average capital city dwelling values in December were still well up from the $572,500 recorded three years ago in the December quarter of 2015. The November reading for building approvals might be low compared with previous years but still implies a reasonable volume of new home building work by historic standards.

This raises questions about how deep the downturn will be and what impact it will have on the development sector and the broader economy. In light of recent pressures on housing affordability, questions may also be asked about whether indeed the slowdown is a bad thing.

For answers, Sourceable spoke with Sean Stephens, Director – Economics at Ethos Urban and Angie Zigomanis, Senior Manager, Residential Property at BIS Oxford Economics. As well, detailed guidance was given in a research note published by ANZ Chief Economist Shane Oliver.

Amongst the three, Oliver is most pessimistic. Speaking particularly about house prices, he says values across the nation are likely to contract by a further five to ten percent this year driven by further price declines in Sydney and Melbourne to the tune of 15 percent.  Overall, he expects Sydney and Melbourne to experience ‘peak to trough’ price declines from the peak of dwelling values in the September quarter of 2017 to the likely trough during 2020 in the realm of 25 percent across both Sydney and Melbourne. This, he says, would imply further price falls of around 15 percent in Sydney and more in Melbourne. This would take home values back to previous levels seen in late 2014/early 2015.

According to Oliver, the declines are being driven by several factors. First and foremost, finance availability has become much more constrained amid both tighter requirements imposed on banks by the Australian Prudential Regulatory Authority (APRA) in 2017 and further pressure to tighten lending practices in response to the banking royal commission. Record levels of housing and apartment construction especially across Sydney and Melbourne has seen massive volumes of new stock hit the market. Demand from foreign buyers has fallen in response to policy changes including special stamp duty surcharges on foreign purchases of Australian real-estate. With interest rates already low, the effect of any further easing in monetary policy is likely to be muted. The potential abolition of negative gearing and the capital gains tax discount is causing investors to factor in potentially less favourable policy settings in the event of a change in government. Just as expectations of rising prices encourage buyers who fear missing out on potential gains, the opposite is now occurring as concerns about falling prices spur those sellers who fear not getting out soon enough into action. Finally, problems with buildings such as Lacrosse and the Opal Tower have dented confidence in building standards and practices (which could see owners and investors facing large repair bills for any defective construction work).

Zigomanis and Stephens, however, are less pessimistic.

Zigomanis acknowledges that further price falls are likely across 2019 and 2020 as tighter financing crimps demand and the volume of new construction coming online has eroded a previous deficiency in housing supply.

Unlike Oliver, however, he expects peak to trough price falls across Sydney and Melbourne of only ten to fifteen percent. In the case of Sydney, he says the city is already close to reaching that point and may not have much further to go.

On construction, Zigomanis says activity will contract through to 2021 once the current pipeline of projects is worked through and as lower prices and a weaker presale market make it harder for marginal projects to get off the ground.

Nevertheless, he expects national dwelling starts to bottom out in 2021 at around 170,000. Whilst this is far lower compared with the near record 228,477 commencements achieved over the twelve months to September last year (the most recent period for which data is available), it still represents a healthy level of building by historic standards.

Supporting prices and home building at these levels, Zigomanis said, are continued strong levels of inbound migration. Prior to the turn of the century, he says Australia typically experienced net overseas migration of around 80,000 per annum or around 120,000 per annum in a good year. Nowadays, he says net overseas migration typically runs at about 200,000 per year in an average year or around 260,000 per year in a good year. Since these new migrants need to be housed, this creates demand for housing and new home building.

Moreover, Zigomanis says construction opportunities are opening up on a growing number of civil and commercial projects.

Stephens, meanwhile, is optimistic.

Given the cyclical nature of property, he says the fact that we are having a downturn in home values and approvals is no cause for alarm.

Whilst he acknowledges that ‘a bit of froth’ has come out of the market, he says there is little sign any imminent crash as the overall economy remains stable, population growth is still healthy and demand for both inner city living and student accommodation remains strong.

Rather, he feels the pull-back in investor led activity will create opportunities for owner occupiers.

“If the economy keeps growing, if the population keeps growing and particular sub markets such as students are still seeking properties – no, I can’t foresee a major crash,” Stephens said.

“If the world enters an economic recession and Australia is impacted by that, that’s a game changer. But certainly, there are no obvious signs that this is something that is around the corner.”

In a similar vein, fears about a housing-induced recession across the broader economy appear to be overblown.

Oliver acknowledges that the housing slowdown will take around 1 to 1.5 percent off overall GDP growth in 2019 as lower house prices detract from consumer confidence and spending and lower levels of home building activity detract from GDP figures. Nevertheless, he expects the economy overall to grow by 2.7 percent as robust levels of infrastructure and business investment keep the economy ticking along.

Zigomanis agrees. He says the lower economic contribution from new home construction will be partly offset by higher activity in commercial building and civil infrastructure. As well, the relatively low dollar is aiding sectors such as education and services. With the resources bust now over, meanwhile, confidence is returning to the mining sector.

Overall, Zigomanis expects the economy to grow by an annualised rate of 2.5 percent per annum over the near term.

“It (the housing slowdown) will definitely be a drag on the economy,” Zigomanis says.

“But we don’t necessarily see a recession on the horizon.”

Is the slowdown a bad thing?

Obviously, any contraction in housing values and home building activity would not be welcomed by developers, builders, investors or owner occupiers.

Nevertheless, the fallback in prices may help to ease affordability pressures and may create opportunities for first home buyers. As well, a return to more normal levels of construction may help to set home building back to levels which are more sustainable over the longer term.

According to Zigomanis, the answer depends upon the magnitude of the drop which does eventuate. Should we get a ‘soft landing’ he says the easing in prices could provide welcome affordability relief whilst seeing construction levels move back toward those which can be sustained over the long term.

More problematic would be a deeper than expected downturn. This, Zigomanis says, this would be detrimental not just to the building sector but also for affordability. This would be especially the case where any downturn led building levels to fall below those warranted by long-term demand. Such a phenomenon, he said, would lead to a deficiency of stock and would create the conditions for the next upswing in prices.

Talking about home building, Stephens acknowledges the importance of the building sector to the economy and cautioned against talking to lightly about any form of silver lining from any reduction in building activity. Nonetheless, he says what we are seeing now is an adjustment from home building levels seen over recent years back to more normal conditions.

On dwelling prices, he says there are positives for affordability but acknowledges that this is detrimental to others such as investors.

“There are winners and losers out of this,” Stephens says.

“Obviously, for those people for whom property is an investment, the loss of value in the residential market is not something that they welcome.

“But for first home buyers, absolutely, there is a benefit to them. I really see that there will be opportunities as prices fall for them to come strongly back into the market as the year progresses.”