Prices are likely to continue dropping moderately in the coming months but will stabilise later in 2019, with some capital cities leading the growth, according to research by Jones Lang LaSalle (JLL).

Global comparisons showed that house prices in the country are high, said Leigh Warner, JLL’s head of residential research for Australia. The rapid price growth over recent decades could be associated with the country’s economic growth, financial deregulation and supply-side constraints, as well as urban structure, tax incentives, and property ownership.

“My colleague Yad Haidari and I recently undertook research to compare Australian house prices globally, investigate why prices are so high and, by extension, determine the risk of the current correction turning into a deeper price collapse,” Warner said. “We examined real inflation-adjusted house prices across 23 countries and found Australia has the biggest increase in the price-to-income ratio since 1975. Real house prices grew by 301% between March 1975 and June 2018, compared with 68%in real income.”

The country’s strong long-term economic performance and population growth have been significant drivers in house price growth over recent decades.

Australia’s population is concentrated in a few urbanised coastal cities, and this has caused prices to soar. Over the past five years, more than 75% of the country’s population growth has been in three cities — Sydney, Melbourne and Brisbane.

“The slow response of construction to population growth contributed significantly to the recent surge in Sydney and Melbourne prices. While supply eventually responded, tight bank lending conditions have already curtailed large-scale apartment development, and supply levels will fall sharply over the next few years,” Warner said.

The research also found that the Great Australian Dream has always been strong, reinforced by a tax system that stimulates investment in residential property. The love for property has pushed Australians to put a higher proportion of wealth into their own or investment properties.

Warner said that Australian’s high house prices would not change. “In the longer term, we will not have the tailwinds that once boosted borrowing capacity. However, population concentration and strong growth will keep prices high. The chances of a price collapse will remain low, but over the next few decades, price growth is likely to be much slower than we have become accustomed to,” he said.

Cause of collapse in Australian prices

Warner said that Australia’s current housing downturn is unusual. The slowdown occurred when economic growth is around trend, interest rates and unemployment are low, and population growth still supports housing demand.

In addition, the condition is concentrated in Sydney and Melbourne. Other major capital city markets and regional Australia have recorded little growth in real prices over recent years and are not experiencing a similar downturn.

“There can be no arguing the policies have both cooled demand and lowered the risk of major oversupply. So, with the debt tap firmly turned down, all that would cause sharp collapse in house prices is a demand shock that lifts unemployment. And the probability of such a shock is relatively low,” said Warner.

Future of house prices

Given the current tight credit conditions, prices are likely to continue dropping in the coming months but stabilise later in the year.

Sydney and Melbourne are likely to log only little growth for an extended period while incomes recover. Capital cities like Brisbane and Perth, and some regional areas, are better placed for solid real price growth from 2020 onwards.