Sydney and Melbourne house prices could return to peak levels sooner rather than later

Melbourne and Sydney house prices could return to peak levels over the next three years, economists are predicting.

With a quicker-than-expected turnaround since the market slump between 2017 and 2019 in both capitals, pressure is now increasing on those looking to get into the market.

Before signs of recovery started in June, Melbourne house prices fell 10 per cent peak-to-trough, while Sydney prices dropped by 14 per cent.

But the pace of the rebound in Sydney and Melbourne had seen forecasts changed as buyers returned to the market after recent interest rate cuts, Domain economist Trent Wiltshire said.

“The property markets have rebounded more strongly than we forecast back in June,” Mr Wiltshire said.

“Based on recent indicators, it looks like price growth over the next 12 months could be above 5 per cent, maybe even around 10 per cent.”

He said prices could be close to their peak levels by the end of next year, although it would take longer for them to fully recover.

“The Brisbane market is also picking up, but the turnaround has been more muted than in Sydney and Melbourne,” Mr Wiltshire said.

Building approvals for new homes and apartments are down. Photo: Paul Rovere

David Plank, head of Australian Economics with ANZ, said it could take a few years for prices to return to their 2017 peak levels, particularly in Sydney.

ANZ was also revising its recovery predictions of a 3 to 4 per cent improvement in house prices over the next 12 months given how quickly prices had turned around in recent months. 

Along with interest rate cuts, changes to lending criteria and the federal election outcome ensuring negative gearing tax incentives would remain in place had also seen a faster recovery since May.

However, he believed the pace of recovery would slow as mortgages were still harder to access than they had been when house prices boomed. 

“I would be surprised if they continue to rise at this rate,” Mr Plank said.

“Eventually at some point in the next few years they will come back to what they were at the peak,” he added. “The question then is, what’s happening to incomes?”

The recent drop in building approval numbers for houses and apartments would also add pressure to prices, with fewer new homes being built.

This would only be a short-term issue with approvals expected to rise “relatively soon” as lending criteria had changed, he said.

“We’ve never had an excess supply problem,” Mr Plank said.

Independent economist Saul Eslake said he hoped prices would not return to their peak too quickly, given Australian properties were some of the most expensive in the world.

“They’re still very high by our own historical standards and international standards,” Mr Eslake said.

In May, global investment bank Morgan Stanley reported Sydney and Melbourne’s property prices were 60 per cent less affordable than those of New York or Seattle.

“People who buy and sell to make a profit, it’s great for them – but the greater general good would not be served by a general rise in property prices,” he said.

He said first-home buyers could be locked out of the market, unable to afford the rise in prices as they had been as prices boomed.

While Sydney and Melbourne’s markets were doing well, Mr Eslake said in other major capitals including Darwin and Perth prices were still flat or declining.

Challenges including the end of the mining boom and struggling local economies had impacted local markets there, he said.

Sourced from Domain.com.au