Is the property market due for a sharp correction?

Some real estate experts and hedge fund managers are saying a sharp correction in house prices is just around the corner.

The Sydney housing market got off to a rocky start this year, with reportedly lukewarm responses at many auctions in various suburbs. This may indicate that Sydney (which has the second most unaffordable major-city housing market in the world) has finally hit a peak.

Overall, there are fewer buyers in Australia’s biggest cities, and sellers have also started to back away. The number of home listings is down 25% from a year ago, according to CoreLogic RP Data.

This has yet to translate into a decline in house prices. In the country’s eight biggest cities, home prices increased 0.7% in January, even though the volume of transactions was lower. However, some experts say it may only be a matter of time before house prices start to decline.

A sharp correction would heap stress on buyers who’ve paid high prices to enter the east coast property markets. It would also damage Australia’s financial institutions, as home loans account for up to 60% of the major bank’s total loan books.

There would also be major economic repercussions should the property market shrink, as the property sector is both a major employer and an important pillar of the economy during a subdued period for the mining sector.

The drop in the number of Chinese buyers is also impacting overall sales. Factors responsible for this drop include Beijing’s stronger money-exit clamps and APRA’s greater restrictions on lending to foreigners.

CT Johnson, general manager at Basis Point, has flagged the Chinese government’s move to restrict foreign outflows of capital as a major risk for the Aussie property market.

“We believe that the first half of 2017 will be slow in the property sector because of the currency issue [in China],” Johnson said at the company’s annual Australia-China Investment round-up.

Meanwhile, hedge fund manager Apt Capital Management has shorted Australian banks because of their exposure to a national property market it believes is out of step with Australia’s economic strength.  As a result, Apt Capital Management is forecasting a severe correction in house prices.

Amy Reynolds, investment strategist at Apt Capital Management, said interest-rate rises and a decline in foreign investment were the most likely triggers for a future downturn in prices.

"Our models indicate that house prices would need to fall by around 30 per cent to come back into line with Australia's economic fundamentals and their own long-term averages," she said.