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Why Sydney house prices could plunge further this year

Sydney house prices could plunge even further this year, with some underlying factors going against it.

Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) have already tightened their lending standards in light of the Royal Commission report. They are probably going to stick to those standards with APRA & ASIC being told to keep on top of things.

But, another factors that could lead to falling prices is that vacant properties have increased by 40% to 22,426 according to SQM Research, as reported by the AFR.

The vacancy rate is currently sitting at 3.2%, with more and more completions occurring this year.

Louis Christopher from SQM Research said that the vacancy rate could rise up to 4% this year, which was last seen during the post-Olympics in 2004.

Sydney’s asking rent prices fell 4.5% over the past 12 months for houses and 2.8% for units. As share investors know, a fall in earnings usually leads to a drop in the value of shares, so if property acts somewhat like shares then a drop in rent could also lead to a drop in house prices.

In January 2019 Sydney saw its dwelling prices fall by 1.3% in just one month, which is an annualised decline of 15.6%. Of course, I don’t expect Sydney prices to fall by another 14% this year, but some market commentators think house prices could fall by 10% this year.

Foolish takeaway

Over the past 12 months, Sydney house prices have fallen by 9.7% and I think this could make things challenging for a variety of businesses, from Avjennings Ltd (ASX: AVJ) to Stockland Corporation Ltd (ASX: SGP) and Boral Limited (ASX: BLD).

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.