The major bank is expecting home values to decline by 10 per cent peak to trough in response to restricted access to credit.
According to the latest Residential Property Price Indexes, released by the Australian Bureau of Statistics (ABS), national dwelling values fell by 0.7 of a percentage point in the March quarter, led by a 1.2 per cent fall in Sydney and a 0.6 of a percentage point decline in Melbourne.
The ABS data revealed that the total value of Australia’s 10 million residential dwellings decreased by $22.5 billion to $6.9 trillion over the quarter, with the median home price dropping to $687,700.
Senior economists at ANZ Research Daniel Gradwell and Joanne Masters have forecast double-digit falls in home values of up to 10 per cent.
The economists predict a 4 per cent decline in nationwide home values in 2018, and a further 2 per cent decline in 2019, driven by price slumps in Australia’s largest capital cities.
“Sydney and Melbourne are expected to be the primary drivers of this fall as their high housing prices and highly leveraged households will be more sensitive to tighter credit conditions and rising interest rates.
“ANZ Research forecasts both cities will see prices fall around 10 per cent peak to trough, with Sydney faring slightly worse than its southern peer.”
ANZ’s forecasters claimed that unlike previous downturns, softening home prices have been “driven by tightening credit availability rather than rising interest rates which have shaped previous cycles”.
The economists added: “Investors in particular are finding it harder to access credit, given ongoing policy changes across the lenders.”
ABS chief economist Bruce Hockman agreed: “Regulatory changes and tighter lending conditions have continued to affect investors, who are more active in the Sydney and Melbourne property markets.
“These cities have seen strong price growth over recent years, particularly in detached dwellings.”
Moreover, the ANZ economists noted that they’re expecting the Reserve Bank of Australia (RBA) to lift the official cash rate twice in 2019, placing further downward pressure on home prices.
“ANZ expects interest rate hikes from the Reserve Bank of Australia in the second half of 2019 to act as a further headwind to prices, seeing further — albeit much more modest — house price declines in 2019.”
Residential construction activity to weaken
The ANZ economists also noted the fall in housing finance approvals, which they claimed signals further softening in construction activity.
“Housing finance approvals for the construction of new dwellings — which have a well-established leading relationship with building approvals — have rolled over and point to further weakness in building approvals in the coming months.”
However, the economists expect the “large pipeline of work” to “remain at elevated levels over the year ahead, even though we think momentum is slowing”.
“At the end of 2017, there were still around 18 months of unit and apartment construction activity in the pipeline, concentrated in Sydney.
“ANZ Research expects residential construction to be around 1 per cent lower over 2018 and down [by] 5 to 6 per cent year-on-year in 2019 given weaker approvals and as the backlog of work rolls over.
“It also expects some further slowing in 2020 but is constructive on the medium term given ongoing strong population growth (and following a significant period of underinvestment).”
[Related: ANZ surprised by prolonged housing weakness]