Interpac Business and Migration Solutions Melbourne Australia

(September 7,2011)

While an economic catastrophe in China or a second credit crunch could spark massive falls in Australian home values, it's more likely that prices will continue their orderly decline into next year as wary buyers stay out of a falling market, says a new report.

Louis Christopher, managing director of SQM Research, predicts that by June 2012 home prices in Melbourne, Brisbane and Perth will be as much as 15 per cent below their 2010 peaks, assuming no rate change from the Reserve Bank. Sydney's outlook is more positive.

"If rates are left on hold, house prices are likely to keep falling well into 2012 with no market bottom until at least the middle of the year," Mr Christopher said in a report from SQM, a property research group.

The group estimates that one rate cut could halt the decline in house prices. Brisbane and Perth house prices had dropped about 6 per cent so far this year, according to SQM, while Canberra's house prices were essentially flat. Sydney houses were down 2 per cent while Melbourne's had fallen by about 5 per cent so far in 2011.

The Reserve Bank kept rates on hold yesterday for the 10th consecutive month, pointing to a clouded view on local and growth growth prospects.

"A key question will be the extent to which softer global and domestic growth will work, in due course, to contain inflation," RBA governor Glenn Stevens said in yesterday's statement on monetary policy.

SQM said the catalyst for a house price crash could take the form of higher interest rates, slower growth triggered by weakening demand for Australian commodities from China, or a massive over supply of new housing stock. In another possibility, bank failures overseas could cause a credit crunch similar to the one in 2007-08, driving up loans costs and cutting their availability, sending prices lower.

"It is, however, important to note that one trigger could bring on another," Mr Christopher said, giving the example of a slowdown in China, which could see unemployment jump from its current 5.1 per cent.

Analysts will get a clearer picture of the overall health of the economy when second quarter growth figures are released today, with analysts predicting a rebound of 1 per cent in the gross domestic product, following a 1.2 per cent contraction in the first quarter of 2011, following the Queensland floods.

Although SQM said homes prices were "overvalued" in some cities, it did not expect a house price crash at the national level, "just modest price falls for houses in most cities".

To date, the median national city home price has lost 3.4 per cent in value according to RP Data-Rismark.

As a result, activity in the housing market has cooled but signs of life remain. Home loans increased by a lower-than-expected 1 per cent in July, according to the Australian Bureau of Statistics. But the weaker pace of growth in the sector has the banks tipping flat or lower house prices for some time come.

Of the capital cities, Sydney stood out as a being on track for house price growth of between zero and 4 per cent by the end of 2012, factoring in no rate change, SQM said. Melbourne prices are tipped to drop between 5 and 7 per cent over the same period. Brisbane's prices are expected to sink between 4 and 7 per cent, while Perth's are expected to drop between 2 and 4 per cent.

Melbourne and Brisbane homes hit their peak prices in June 2010, while Perth's were at their highest in March 2010, SQM said.