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Economists predicted house prices would stabilise in 2016, but the opposite happened

The Guardian logo The Guardian 4/01/2017 Gareth Hutchens


Soaring house prices have put the spotlight on some of Australia’s economic soothsayers.

At the start of last year, the common view among economists was that house prices would stabilise in Sydney and Melbourne by the end of 2016. Some even predicted prices would suffer a significant correction, falling by up to 7% in Melbourne.

But figures show the opposite happened.

According to CoreLogic, dwelling values rose staggeringly last year, by more than 15% and 13% respectively in Sydney and Melbourne, continuing the fast pace of price growth since the global financial crisis. It means dwelling values have almost doubled since the GFC in Sydney, rising 97.5% since January 2009, while in Melbourne they have risen 83.5%.

Aerial view of a residential suburb of Melbourne: House prices rose staggeringly inMelbourne and Sydney in 2016, and economists mostly got their predictions wrong.© Getty Images House prices rose staggeringly inMelbourne and Sydney in 2016, and economists mostly got their predictions wrong. “Sydneysiders saw dwelling values increase by approximately $10,000 per month over the past year, creating a significant boost in wealth for home owners,” Tim Lawless from CoreLogic said. “At the same time we’ve seen mounting affordability challenges for aspiring home owners.”

How did economists underestimate such strong price growth? Saul Eslake, who thought dwelling values would barely rise in Sydney or Melbourne in 2016, said he did not foresee a number of things.

He did not think the Reserve Bank would keep cutting interest rates last year. But the RBA cut rates twice, to a historic-low 1.5%, after ultra-low inflation caught it by surprise in March. That had helped to boost house prices, Eslake said.

He also did not predict population growth would be so high, particularly in Victoria. Figures show Australia’s population rose 337,800 in the 12 months to 30 June, the highest annual figure since the September quarter of 2014, while net overseas migration occurred at a higher-than-expected level, at 183,000 people for the 12 months to 30 June. Victoria and NSW absorbed nearly all of that net overseas migration.

Eslake said he also believed measures by the Australian Prudential Regulation Authority to rein in lending activity was going to have a greater impact than they did. And in the world of politics, he thought the Turnbull government would have to curb negative gearing or the capital gains tax discount last year, given how much political pressure it was facing. But the government ruled out any changes in April.

Stephen Koukoulas, from Market Economics, predicted house prices would fall sharply in Sydney (-6%) and Melbourne (-7%) last year. He says he made similar miscalculations.

He did not think the RBA would cut rates; he believed population growth, and net overseas migration, would not be as strong as they had been in previous years; he also believed the investor market was going to cool thanks to regulatory changes implemented the year before. “And there was a slight cooling in investor activity until the middle of the year ... but it didn’t remain that way,” Koukoulas said.

The Reserve Bank is now warning conditions in the established housing market have strengthened in recent months. “In Sydney and Melbourne, housing price inflation had picked up and auction clearance rates were at high levels,” said the RBA’s 6 December board meeting minutes.

CoreLogic data shows average dwelling values in Australia’s eight major cities rose 10.9% overall last year, supported by strong increases in Hobart (11.2%) and Canberra (9.3%). But dwelling values did fall in Perth, down 4.3%, as the Western Australia’s economic downturn hit the city hard.

“Those regional areas with intrinsic ties to the mining and resources sector have continued to record weaker housing market conditions since the end of the mining infrastructure boom, with Perth and Darwin recording the weakest housing market conditions across the capital cities,” Lawless said.

“Since values peaked in these markets during 2014, values have fallen by a cumulative 7.9% in Perth and 5.9% in Darwin.”

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