Housing market downturns: Lessons from history
The housing market growth cycle has broadly been running for almost four-and-a-half years, with dwelling values across CoreLogic’s combined capital city index rising by 40% since June 2012. Sydney dwelling values have risen by 63% since values started pushing higher, and dwelling values in Melbourne are up a lower – but still strong – 46% over the same time frame. Considering the maturity of the growth cycle, the new unit supply moving through record levels, rental yields producing historic lows and mounting affordability pressures, it’s worthwhile revisiting what housing market downturns have previously looked like.
The last time we saw a housing market growth cycle this long and strong was the ‘boom’ period that broadly tracked from early 2000 through to early 2004.
At that time, the pace of capital gains was even faster, as housing markets were spurred on by a combination of low interest rates, improving economic conditions and a strong mix of first home buyers and investors. As a refresher, using the same number of months that the current cycle has been running, the Sydney housing market reached a peak rate of cyclical growth in September 2003, with dwelling values rising 77%. That’s a faster pace of capital gain than what we’ve seen over the current cycle.
In Sydney, dwelling values peaked in March 2004, before falling by 8.2% over the next 21 months. It took 42 months for the Sydney housing market to stage a nominal recovery, with values recovering to their 2004 high point in September 2007. The recovery was, of course, short-lived, as the GFC was just around the corner, causing Sydney dwelling values to fall by a further 6.2% across 2008. On the back of a range of stimulus measures, including lower mortgage rates, first buyer incentives and cash handouts, Sydney home values surged higher in 2009 and 2010, before dwelling values fell by 5% between November 2010 and June 2012.
The three most recent periods of decline across the Sydney housing market are a stark reminder that dwelling values don’t always rise. Generally, growth cycles are followed by a period of decline, or more stable market conditions, which provides time for yields and affordability to improve.
If the past two decades of housing market cycles are anything to go by, it is rare for a growth cycle to last more than four years. Natural disincentives, such as low yields and affordability constraints, are likely to curb buyer demand. Additionally, lenders will become increasingly cautious about lending into markets where home values have risen substantially which is also likely to act as a brake on the high rates of capital gain. Add high supply levels, particularly across the unit market, and it seems likely that the Sydney housing market is rapidly approaching its peak. However, the main difference between previous housing market cycles and the current cycle is that previously, interest rates were rising, but today they have been falling.
While values across Australia’s largest housing market may fall, the magnitude of any downturn across Sydney is likely to be muffled by the positive effects of ongoing population growth, low interest rates providing an ongoing incentive to buy, and continued robust economic conditions. The offset to these stimulatory factors will be seen in the significant unit supply pipeline, growing lender caution and low rental returns, which are likely to act as a disincentive to investors who currently comprise more than half of all mortgage demand across New South Wales.
Supply levels across Sydney’s detached housing market have been much lower than medium-to-high density supply additions, which suggests that the detached housing sector may be less exposed to a housing market downturn than the unit sector.