Housing affordability: Sydney and Melbourne housing market update

Sydney and Melbourne housing market update

Sydney and Melbourne house prices will continue to fall further this financial year, before plateauing and then recovering over the following two years. While there will continue to be price declines in the near term, KPMG expects prices to bottom out in Australia’s two major cities in calendar 2019. The market will then start to see price growth again in Melbourne during 2020 and Sydney in 2021.


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KPMG Economics has previously prepared two research papers on the factors influencing house prices and housing affordability, with a particular focus on the two largest housing markets in Australia; Sydney and Melbourne.

Our last research paper Housing affordability: What’s driving house prices in Sydney and Melbourne? applied econometric modelling techniques to reach a conclusion that home buyers already intuitively knew; housing markets are complex. This complexity stems from the fact that while house prices are influenced by a range of factors, like interest rates, building activity and population growth, these factors influence house prices in combination and often counter balance each other to some degree.

KPMG’s analysis found there to be a long-run relationship between house prices and variables relating to the stock of dwellings, population and lending to residential property investors. That is, over time house prices tend to revert back to the equilibrium suggested by the long run relationship, but that in the short run transitory dynamics can counteract or reinforce this reversion to long run equilibrium.

The model developed by KPMG seeks to encapsulate these short and long run dynamics of the property market. We have previously described this cycle in the following simplified way; price pressures induces new construction activity; dwellings are over supplied relative to current demand; prices drop (or stay flat); access to financing for new development becomes tighter, resulting in a decline in new supply; demand soaks up the excess supply over time; prices rise; access to finance is opened up again; developers start building again; and dwellings are over supplied (again).

Our analysis found that by the end of FY2016 short term factors had pushed median dwelling prices for Sydney and Melbourne above their long term equilibrium prices by about 10 percent and 4 percent respectively. At the time we also suggested this degree of disequilibrium had been experienced previously in these housing markets, and they had managed to return to equilibrium without a severe price shock.

A year and a half has now passed since our last research paper, and during that time the housing market in Sydney and Melbourne has experienced, to varying degrees, a decline in dwelling prices. Various commentators are now suggesting the housing market is set to fall further in the coming year(s), with “a 10 percent or so price falls in Sydney and Melbourne”.

Data is now available for the period up to the end of FY2018; two additional years of information in which to incorporate within our analysis. KPMG Economics has updated our modelling results for this data, and also reconsidered the likely parameter values that may materialise over the next few years.

The remainder of this report includes:

  • a discussion on recent trends in dwelling price movements in Sydney and Melbourne
  • commentary on how key parameters influential to determining dwelling prices have moved in the last two years and
  • what our short term price forecasts are for dwelling prices in Sydney and Melbourne based on our expectations of the model parameter values during that period.

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