Economists Believe Apartment Prices Could Go Bust

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Tuesday, March 8th, 2016
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Australia isn’t in the midst of a housing bubble, but there are signs apartment prices could collapse, economists warn.

House prices have risen by nearly a third since May 2012, led by the booming Sydney and Melbourne markets, but Commonwealth Bank managing director of economics Michael Blythe says that doesn’t show the whole picture.

He says a combination of depressed demand and increased supply is gradually cooling the market and house prices have started to fall.

“Demand and supply are moving in a way that favours a slowdown in house price growth,” Mr Blythe wrote in a note to clients.

“The momentum behind dwelling prices rises has stalled over the past year.”

The economist said while surveys over the past few years showed households believed dwelling prices would continue to rise, their belief has waned sharply since late 2015.

“Bubbles (and negative gearing strategies) also require a belief that prices will continue to rise at a rapid pace,” he said.

“The majority now see it as a bad time to buy a dwelling. Falling buyer sentiment is typically followed by a slowdown in residential sale activity.”

Along with less demand, Mr Blythe said there was a major residential construction boom with the supply of new buildings lifting.

He said the number of new dwelling starts was 220,000 in 2015, and forecast to be 211,000 in 2016, against an underlying demand of 185,000.

“The lift in construction activity mean that the construction:population ratio is back around average levels,” Mr Blyth said.

However a separate report released by Monash University predicts the change in supply will make apartment prices go bust, rather than cool the overall market.

The university’s Australian Population Research Institute says most housing demand came from young people wanting to start a family, rather than single or two-person households.

“The boom in high-rise apartments is producing housing that is largely irrelevant to resolving the housing affordability crisis in both Sydney and Melbourne,” report authors Dr Bob Birrell and David McCloskey said.

The report predicted apartment prices would collapse as thousands of units came onto a market in the next two years.

“The resulting financial turmoil will deliver a wake-up shock to housing purchasers,” the report said.

“It will tell them that the underlying assumption driving their investment, that dwelling prices can only go up is incorrect.”

However, the authors did not expect a bust in detached dwelling prices given the continuing shortage of that type of housing stock.

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