Q. How Low Will Sydney and Melbourne Prices Go Down from their Peaks This Cycle?
A. Perhaps More Than Usual but Not As Much as Many Fear or Are Predicting

In the course of negotiating a big acreage sale this week we had the welcome opportunity to chew the fat with someone who knows most markets around the country better than most and probably the Sydney market better than anyone.

Let’s call him Peter because that’s his name though given he is still quite active ‘below the radar’ in the Sydney market particularly we’ll withhold his surname.

Peter is a lot of things but in my 20 plus years of knowing him I can say that he has always maintained a very positive outlook on residential property and been a very positive voice for the sector.

So I was pretty disturbed to hear from him that he thinks the Sydney market will correct (as in drop) by 30%.

That’s a lot! 

Could Harry Dent or Associate Professor Steven Keen (remember him?…) finally be proven right?

And now halfway through writing this I see Sixty Minutes has got in on the act and upped the ante for both Sydney and Melbourne with predictions of drops in the order of 40%. Were that to happen that would virtually wipe out most of their recent gains.


Normally when capital city markets finish peaking they settle between 5 and 10% off their highs. 30% is an entirely different story and would be unprecedented in our history (which is partly why I don’t agree with it but more on that later).

Some points of note:

Sydney was long overdue for a catch-up prior to its market taking off 3 years ago, Melbourne also though not as much.

Sydney had some additional fuel in the tank prior to the boom starting given as a state they had made great inroads into getting their finances back in order.

At the same time the southern capitals started their cyclical catch-up run, there was a concerted rush to get money out of China while it was still possible (which while it still is possible today, it is infinitely harder, at least for most).

China liked and likes Sydney’s and Melbourne’s tertiary institutions which added further fuel to their fires (and Brisbane’s increasingly now that UQ has soared up the international rankings).

Record low interest rates had also greatly increased housing affordability at the same time making just leaving the money in the bank an unattractive option.

Just as the Sydney market peaked with Melbourne’s not far behind came the blatantly politically motivated and belated decision to get a government body involved to cool the market in the form of APRA (the Australian Prudential Regulatory Authority) being commissioned to place limits on bank lending.

As this was happening China was greatly ratcheting up efforts to stop its people taking their money out of country.

And then came the equally politically inspired decision to run the Banking Royal Commission…….

But back to Peter and Sydney (which pretty much means Melbourne in 6 months time given normal state to state progression). 

Peter explained that where 2 years ago 80% of the 10 – 20 who turned up to bid at an auction were Chinese and the balance mostly locals of European descent and where the bidding was fast and furious, today of the 2 - 4 people that turn up to register to bid for the same product, there will be only be between 0 - 1 Chinese or locals of European descent and the balance majority (1 – 3) a new profile of buyer, people of Southern or South-Eest Asian extraction who often won’t bid unless it’s a clear bargain.

He says that the downturn has been so swift it has caught many agents napping and that many won’t survive.

As dismal an account of their status quo as that is, it does marry up with the tone of recent reporting, including just this week that turnover is down in many parts of Sydney by up to 50% and in Melbourne 25% from their highs.

Remembering though that sometimes when you are wallowing in a sea of despair it can be hard to maintain your usual market prescience (i.e. you can’t see the wood for the trees) what then from someone not so close to the coalface is the likely washup for the southern capitals? 

Looking back through history, all capital city markets have tended to settle post each boom some 5 - 10% off their highs and despite the current doom and gloom pervading their markets I still feel that will be the same this time around, as indeed will it be for ourselves once our nascent catchup now underway has fully run its course (some 2 years from now).

Their cyclical bounce off the roof could feasibly in my view extend to 15% if the planets align particularly badly but I would think given the political sensitivities of anything close to that becoming reality I tend to think it probably won’t (be allowed to) happen.

Before you break out the champagne in celebration however, remember that 10 or 15% down is substantially more dollar wise than is 10 or 15% up. That is a mathematical reality that most people are not aware of. 

If a price goes up 10% say from $1million it becomes $1.1million. If it then contracts by the same 10% from $1.1million it goes back an extra 10% to $990k. 

Therefore if Sydney’s median house price contracts 10% from its early 2017 $950k peak (assuming that is the real number which nobody can know for sure), that would see it settle in the mid $800k’s, this still a substantial lift from its pre-boom $550k. 

Melbourne will perform likewise which would see its average house price down around $100,000 off its peak but still some $250k higher than it’s pre-boom average.

Looking deeper into the same crystal ball, if we perform in unison over the space of the next two years our average house price should climb (from last year’s $475k) to peak around $775k from where it would normally settle around $700k and largely plateau from there until the next cyclical lift.

That’s the way history would see it and as we know history has a habit of repeating itself.