What now for Sydney property prices? Five economists give their predictions

After five years of soaring property prices the question on the lips of Sydney’s buyers and sellers is clear: will booming prices continue? 

Domain asked five top Australian economists to provide their forecasts for price growth in Sydney over the next 12 months.  

Each of them had a unique take on the market – some expected prices to be relatively flat, others anticipated falls in the median price.

Experts were split on the future of Sydney’s property prices. Photo: Mark Merton

But the majority agreed on at least one point: Sydney’s double-digit growth days are over.  

Most of them cited concerns about increased restrictions on investor activity, more apartment development and the market simply running out of steam.

“Throw all these things into the melting pot and it appears as though the long-overdue cooling in Sydney and Melbourne is poised to happen.”Stephen Koukoulas, Market Economics

Although there were significant differences in the forecasts, the outlook for the apartment market is clearly bleaker than the housing market, due to pockets of oversupply potentially putting downward pressure on prices. 

And, depending on whose viewpoint you subscribe to, the difference in next year’s median price could be as much as $100,000.  

The panel

• AMP Capital chief economist Shane Oliver
• Market Economics managing director Stephen Koukoulas
• Compass Economics chief economist Hans Kunnen
• BIS Oxford Economics managing director Robert Mellor
• Domain Group chief economist Andrew Wilson

Read the panel’s Melbourne predictions here.

Apartment outlook

• Three expect prices to fall.
• Two expect prices to increase.
• Highest outlook: Growth of 5 per cent
• Lowest outlook: Fall of 7 per cent

There was a definitive split on where apartment prices are heading in the next 12 months – with two in the panel predicting rises and three expecting falls.

The most bearish of the lot was AMP Capital chief economist Shane Oliver, who forecasted a 7 per cent decline for the next 12 months.

Market Economics’ Stephen Koukoulas tipped a 2 per cent drop, while BIS Oxford Economics managing director Robert Mellor expected a 1 per cent decline.

If the bears have it right, by June 2018 Sydney’s current apartment median of $758,000 could drop to anywhere between $705,000 to $750,000.

Dr Oliver’s 7 per cent decline was based on unchanged interest rates for the next 12 months, but a likely increase of 25 basis points for bank mortgage rates on interest-only loans for investors.

He was also expecting another round of tightening measures from the Australian Prudential Regulatory Authority, and a cooling of offshore demand.

“This, along with a surge in the supply of units, will likely result in falls in unit prices and a slowing in home price gains,” he said.

Mr Koukoulas pointed to supply-side pressure and a tightening on loans from the banks, which also led him to predict 0 per cent price growth for houses.

“Throw all these things into the melting pot and it appears as though the long-overdue cooling in Sydney and Melbourne is poised to happen,” he said.

Mr Mellor also expected apartment price falls – of 1 per cent – in Sydney, basing his predictions on an outlook of stable interest rates for variable home loans and no change in the official cash rate.

He also anticipated a “substantial reduction in investor demand from local and offshore buyers, but a modest pick-up in first-home buyers in response to state government changes on stamp duty”. 

A downturn in these two buyer groups would most likely hit the apartment market, given investors and offshore buyers typically favour units.

However, with the record apartment building boom already waning, some doubt the looming threat of oversupply.

HIA chief economist Shane Garrett was anticipating a significant fall in home building, with apartment starts declining 18.4 per cent in 2017/18 compared to 2016/17, and house starts dropping 14 per cent over the same period.

“We see the downturn in the new dwelling starts as arising from the a few factors, particularly the tougher regime around foreign investor participation in the property market and tighter financing conditions on the domestic investor side,” he said.

Dr Wilson said Sydney apartments were not heading for oversupply and anticipated prices would increase 5 per cent on the back of “strong fundamentals”, including population growth. 

Compass Economics’ Hans Kunnen shared a positive outlook for Sydney’s unit market.

House price outlook

• Two experts predict price growth to be flat.
• Two forecast prices to increase.
• One predicts prices to fall.
• Highest outlook: up “5 per cent to 10 per cent”
• Lowest outlook: Falls of 2 per cent

The panel of experts was divided on the outlook for house prices. 

Mr Mellor expected prices would fall 2 per cent, Dr Oliver and Mr Koukoulas said they’d be flat, while the other two economists anticipated reasonably strong price growth.

This could leave Sydney with a median house price anywhere from $1.15 million to $1.27 million by mid-2018. 

Mr Kunnen expected a strong growth trajectory in the bracket of 5-10 per cent, noting “firm population growth and good levels of economic activity”.

“Interest rates are not expected to rise and current APRA regulations seem to have stemmed the excesses of investment lending.

“While pockets of oversupply may occur … there is also likely to be reasonable demand and access to finance.”

In fact, most experts pointed to continued demand for houses – and less building of this type of property – as a reason this segment of the market would be stronger than seen for apartments.

Dr Wilson said double-digit growth in future years was unlikely, but there was still some upside in the shorter term.

“Sydney will grow but nowhere near where it was previously,” Dr Wilson said.

On the ground some agents are already witnessing a slowing market. 

Starr Partners chief executive Doug Driscoll, whose offices cover half of Sydney including the investor-favourite areas of the west, said prices had started to “plateau” but the data was yet to show this.

He was expecting “a nominal decrease” prices early next year but thought the housing market would be more robust than the unit market.

Dr Wilson said it was “hard to pick a trend over the medium to longer term … drivers can change, over a short-time period it’s like picking the weather.

“Even policymakers have trouble forecasting on a quarterly basis – we see so many forecasts that are consistently wrong.”

With that in mind, it’s no surprise even some of the most experienced property experts couldn’t agree on what the future holds.

The predictions