Chan & Naylor accountants in Melbourne give expert advice on property investment for 2018.

Australian housing market to cool down in 2018

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The national house price growth is set to run at low single-digit rates this year, signaling the end of Australia’s housing boom.

After several years of strong house price growth in Sydney and Melbourne, the market now starts to cool in both cities with prices falling 1% in Sydney and increasing only 7% in Melbourne annually. Other capital cities has experienced low single-digit house price growth in 2017.

This slowdown was caused by the increased housing supply and tightened prudential settings. Foreign demand has also pulled back because of restrictions on Chinese capital outflows, lending constraints and increased local taxes. It is predicted that national housing price growth will slow down to 3-6% in 2018. There is still a large pipeline of apartment construction underway and it could be a modest drag on GDP growth into 2019.

A sharp decline in house prices is not expected. There may only be a modest decline in construction activity because of strong population growth, low interest rates, a slow pace of cash rate tightening and relaxation of prudential settings. However, it has put more downward pressure in Sydney and Melbourne, which tend to attract local and foreign investors.

Unless there’s a negative shock from abroad or a sharp increase in unemployment rate, there won’t likely be a hard landing. Note that Australia has many housing markets with considerable divergence across capital cities. Sydney and Melbourne prices are up 71% and 58% higher, respectively while Brisbane and Adelaide had price gains of only 20% and 17%. On the other hand, Perth prices have remained flat.

There has been a large ramp up in unit construction across the country, weighing on apartments prices in cities where the boost has been strongest. In Melbourne and Brisbane, unit price growth has been weak compared to detached dwellings. However, the standout market remains the detached dwelling market in Melbourne with price growth still running at double-digit rates.

Australia likely has a housing boom and not a bubble because there appears to be no misallocation of lending or an oversupply of houses. There appears to be no national oversupply yet but the supply and demand gap could be closing. New building approvals have dropped back from their 2016 peak levels.

The estimates are arguably dependent on the number of unoccupied dwellings, demolition rates and household formation rates but it is still hard to see significant oversupply, given the strong population growth and the accumulated undersupply in NSW. At most, there could be an oversupply in the Brisbane and Perth apartment markets.

The housing market cooling could mean a negative wealth effect, a drop in housing construction and a demand for household goods. However, with a little positive wealth effect in recent years, a little negative effect is also expected. The high and rising levels of household debt remain a concern but there won’t likely be a significant weakening in household spreading.

The economy needs to grow further and household income growth should pick up. The GDP growth is expected to increase from 2.4% in 2017 to 3.2% in 2018. Mining investment may stabilise and non-mining investment may continue to rise because of infrastructure investments, improved business conditions, strong jobs growth and inward migration.

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Chan & Naylor Group has nationwide offices in Brisbane and Capalaba in Queensland, Melbourne and Moonee Ponds in Victoria, East Perth in Western Australia, and South West Sydney, Parramatta, Pymble, North Sydney, and Sydney in New South Wales.

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