After a few months of their house sitting forlornly on the market, my neighbourhood friends have just pulled down the “For Sale” sign.
The planned auction was cancelled weeks ago due to a lack of competitive bidders. Since then, buyer interest has been virtually non-existent – certainly at anything like the price the would-be vendors had been hoping for and were told they would attract when first talking to an agent earlier this year.
Downsizing, they now gloomily accept, will have to wait, possibly many years. This has become a common Sydney and Melbourne story, another example of the dramatic ups and downs in the Australian property market.
Instead of dinner party conversations lamenting high house prices impeding the ability of anyone’s children to buy in, the bigger concern now is how much further prices will fall.
OK, that might sound absurdly indulgent given the dramatic increase in house prices over the previous five years.
Compared to a 70 per cent plus rise in Sydney and close to 60 per cent in Melbourne, what does a single-digit decline over the past year really matter?
But more economists and industry players are now predicting much bigger declines to come, certainly in Australia’s biggest two cities. Auction clearance rates are now in the mid 30 per cent range.
The last time that happened was exactly a decade ago in late 2008 as the global financial crisis hit confidence and the economy.
This decade’s version is due to a potent combination of factors. It includes regulators moving to cool investor purchases, banks tightening lending standards in response to revelations and potential recommendations from the royal commission, governments making it harder and more expensive for foreign (Chinese) investors to bid while a glut of new apartments has come on to the market.
Then there’s Labor’s plan to ban negative gearing for investment properties and half the capital gains taxes concession. Given the state of politics, that no longer looks like a theoretical or distant risk to prices.
The result is that Fear Of Missing Out has been replaced by Fear Of Over Paying – when it looks as if the market will only become cheaper in the months and probably the years ahead.
Yet the abrupt change in sentiment is happening when the Australian economy is still thriving, unemployment is falling and the government is insisting better times are ahead for wages growth.
So what happens now? Alert readers may recall my credibility on this issue is threadbare given my strong advice to my 20-something daughter to rush to buy a modest apartment at an eye-watering price at the very peak of the market midway through last year.
My about-to-be son-in-law has kept a dignified silence on this so far but my daughter is blunter about why they will never again take notice of my recommendations – except perhaps to do the opposite.
For obvious reasons, I have since restrained myself from offering any property suggestions to my sons.
I am, however, reassured to know I am far from alone in my inability to pick what would happen in the property market in 2018.
Just one economist surveyed by The Australian Financial Review in mid-last year predicted prices would fall – and his estimate of a 4 per cent fall in Sydney is already overtaken. Other economists believed prices would increase in Sydney by as much as 9 per cent.
It’s another example of how market excess eventually produces an inevitable but somehow unexpected overreaction – creating new unintended consequences that will take too much time to recognise, let alone correct.
The slowdown in prices in Sydney and Melbourne is still not likely to translate into the more alarmist predictions of 40 per cent market falls – but what would I know?
Rather more credentialled types like AMP Capital’s Shane Oliver, for example, predict the market will fall 20 per cent peak to trough. That’s probably the good news.
The bad news is that property has been a major driver of economic growth and that a big reduction in development activity will inevitably spread more broadly.
Similarly, the obverse wealth effect when households hear the average house is dropping $1000 a week in value will increasingly dent consumer confidence and willingness to spend.
That’s the backdrop to the Coalition’s enthusiasm for warning of the terrible risks to prices and the entire property market due to Labor’s policy of banning negative gearing for other than new properties and halving the 50 per cent capital gains taxes concession.
The Coalition attempted to make this Labor policy an election campaign issue in 2016 but with stratospheric property prices and great concern about housing affordability, this didn’t have much political impact. Many voters thought the result would be beneficial in cooling an apparently out-of-control market.
The property outlook these days is obviously very different. A report commissioned by Master Builders Australia says the ALP policy would mean a big hit to the economy due to a massive fall in housing construction activity over the next five years, worsening the current downturn.
That sounds suspiciously like another unintended consequence looming. It makes Labor’s policy more high risk – politically as well as economically.
But Chris Bowen, Labor’s treasury spokesman, insists the slowdown will just allow it to “be implemented more smoothly” because so many investors have left the market.
“I mean the property market is slowing now but it will quicken at some point and investors will roar back into the market, but we are getting the policy settings right now to ensure that first-home buyers are on a more level playing field,” he said on ABC radio.
Try selling that idea to a Sydney or Melbourne homeowner in a rapidly falling market. Feels more like catching a knife.