Twenty Percent Drop Predicted As 'Perfect Storm' Heads For Property Market

Property investors should remain cautious of the housing market in Australia's two major cities, an economist has warned.

Tightening credit conditions, supply rises and a negative feedback loop could see property prices in Sydney and Melbourne fall by around 20 percent by 2020, according to the latest AMP forecast.

Chief Economist Dr Shane Oliver said while forecasters had long predicted a 15 percent drop, a trend of continued downward risks could now see property prices in Australia's two biggest cities drop by around five percent more within the next two years.

Australian capital city home prices have continued to fall over the last 12 months and are now down four percent from their peak, Oliver said.

Poor affordability, regulator pressure on bank lending, cutbacks in foreign demand, falling growth expectation and banks withdrawing from Self-Managed Super Fund lending, are all contributing to the recent turning tide in pricing.

"On their own some of these are not significant," Oliver said.

"But together they risk creating a perfect storm for the property market."

While the biggest drop is predicted for Sydney and Melbourne who were most affected by the recent boom, Oliver said average prices are also expected to drop by around 10 percent across the country.

Image: AAP

"Home prices in Perth and Darwin are either at or close to the bottom having fallen back to levels seen more than a decade ago," Oliver said.

"Prices are likely to perform a lot better in Adelaide, Brisbane, Canberra and Hobart along with regional centres as they have not seen anything like the boom in Sydney and Melbourne."

While the recent move from "boom to bust" has naturally incited some panic about a market crash, Oliver said it remains unlikely but warns the risk shouldn't be ignored.

Forecasters predict that a crash equating to a fall of more than 20 percent across national average prices would only be likely if we see much higher rates of unemployment, a continuation of high construction for several years or a collapse in immigration.

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The AMP predicts none of these scenarios are particularly likely as Australia is continuing to see strong population growth and believe the risk of mortgage stress is typically "overstated."

"However, the risk of a crash cannot be ignored given the danger that banks may overreact and become too tight and that investors decide to exit in the face of falling returns, low yields and possible changes to negative gearing and capital gains tax," Oliver warns.

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Oliver said he would caution investors considering the Sydney and Melbourne property market which remains expensive, while other cities not affected by the boom remain less vulnerable and offer "much better value."

Featured Image: Getty