Sydney, Melbourne in 5 years: How long will the property downturn last?

By the end of the year, both capital cities will remain in a downward trajectory, the property researcher said.

“The market's in a downswing after very long upwards trajectory. We should expect this housing downturn to be more substantial than what we've seen in the past, mostly because the past is a really low benchmark.”

“This will be the biggest downturn the Sydney market's ever seen, and our data goes back to the 1980s, during the last recession. During the early 90's, we saw Sydney values fall by about 10 per cent over about 24 months. Sydney's almost down by 10 percent now.”

“I think we'll absolutely see Sydney record a larger decline than 10 per cent—probably more like 15 per cent, and over a long timeframe as well,” Mr Lawless explained.

The longevity of the downturn is mostly attributed to the unique elements that impacted the current property market, including credit availability and financial regulation.

“We haven't seen the normal catalysts of a market cycle just yet, which is typically monetary policy changes or economic conditions either worsening or improving.”

Sydney in downturn

As the Sydney property market continues to decline, every investor tries to predict when it will bottom in order to capitalise on its eventual rise. Are we almost there?

Sydney took its time to decline, and the same pace at which its currently going down is expected to be the pace at which it will go up once it has bottomed out, Mr Lawless said.

“It's a great way to look at the market—look at the previous downturns and the trajectory of decline, then look at the upswing—to find out how long does it take property values to recover? Remarkably, it takes about the same amount of time for a property market to recover as what it did to reach a trough.”

“Will that happen this time around? Well, if history is anything to go by, probably. But, the big question is: How long will the property market stay in a downturn?” the property researcher highlighted.

According to Mr Lawless, the downturn could last as long as the financial conditions remain tight since credit restrictions across the marketplace will continue to curb demand. Moving forward, he expects less focus on interest-only lending, high loan-to-value ratio lending, high debt-to-income ratio and overall investment lending.

Still, there remains a number of good opportunities in the Sydney property market.

For one, the owner-occupier segment of the market has maintained its resilience through the stormy cycle across the capital city.

“If you think about the market segment that's been most resilient, it's owner-occupiers. We've seen a real upswing in first home buyer activity, and part of that is being fueled by stamp duty concessions in New South Wales and Victoria.”

As Sydney and Melbourne become more affordable due to the continuous decline in property values, Mr Lawless foresees a substantial increase in investment activity across the marketplace.

Melbourne's resilience

While Melbourne is going through a downturn like Sydney, the Victorian capital city has been more resilient compared to its New South Wales counterpart.

Until recently, Melbourne has sustained growth across its property market around six months longer than Sydney was able to, mostly due to the stronger migrations trends in the metropolitan areas, from interstate migration to overseas migration.

Even if the capital city has started to see slight declines on migration trends, Melbourne remains as the ‘population growth powerhouse’ of Australia, with its population rising by more than two per cent per annum.

“Melbourne seems to have a better fundamental than Sydney in terms of demand drivers,” Mr Lawless highlighted.

However, the strong demand is met by high levels of supply, which triggers an imbalance in the Melbourne property market, particularly the apartment market.

“Supply and demand is obviously a concern. We're going to need these properties at a point in time, but it's a matter of whether or not it will impact property prices for the immediate term.”

Five years into the future

Five years from today, both Sydney and Melbourne property market will have bottomed, according to Mr Lawless. Then, the upswing that is expected to follow will be a gradual process.

Prices will be roughly around 10 to 15 per cent lower than their current state. From there, modest upward movements are expected to be witnessed across both capital city markets.

However, a big part of this cycle will be dependent on the state of the local and national economy.

Mr Lawless said: “What happens with the economy? Do we see any changes to taxation policy? What happens with our population growth? There's a lot of factors that could obviously impact the marketplace.”

If the current cycle follows historical trends, Mr Lawless foresees the downturn ending by 2020, followed by slow growth across the capital cities.

“Gut feel is we'll probably move through the downturn sometime in 2020. From there, we'll start to see a gradual upswing in prices. Sydney and Melbourne will be quite similar, even though the population growth and the economies are a little bit different. I think we'll probably see both markets behaving quite similarly.”

“If you find out where the bottom is, you're probably guaranteed a 15 per cent uplift in about 18 months to 2.5 years,” Mr Lawless concluded.

Tune in to Tim Lawless' episode on The Smart Property Investment Show to know more about the predictions about the future of the Sydney and Melbourne property markets.