A group of housing experts have projected that the worst Sydney housing market in 50 years is about to unfold.
The BIS Oxford Economics study shows that the current Sydney house price falls is only halfway in terms of the length of time of property downturns, according to the AFR.
This won’t be music to the ears of executives at 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).
According to the stats, the average downturn for the Sydney housing market is 14 quarters, with an average real price decline of 21%. So far we are only through six quarters of house price declines to the end of the December 2018 quarter. ‘Real’ medium prices show a decline of 16% right now.
The AFR quoted Angie Zigomanis from BIS Oxford Economics as saying “So far, the period of decline in these two markets has been much shorter than the longest downturn duration and around half of their respective average downturn lengths in both the house and unit markets.
“Therefore it is foreseeable that the current downturn in the Sydney and Melbourne markets may have at least another year to run before reaching the cyclical trough”. This would represent the worst house price fall in 50 years if falls continue at the same pace over the next year.
I believe it’s almost certain that March 2019 will show another heavy decline in house prices, even though the Royal Commission is over. Until the clearance rate is materially above 50% it’s likely that house prices will keep ticking downwards.
Australian households remain heavily indebted and the household savings rate has hit a multi-year low.
Some economists are now pencilling in a RBA rate cut (or two) this year, which may do something to ease the pressure on current homeowners. But, people looking to take out a new loan may still face issues relating to their debt to income ratio and the affordability of the loan.
I’m very glad I don’t own an investment property at this stage, or shares of a bank. Until house prices stop falling there is a risk to many of a number of assets and industries related to property.
I would much prefer to hold defensive long-term quality shares such as these in my portfolio right now to weather whatever happens next.
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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.