Summary

The housing market has been the driving force behind the NSW economy’s recent resurgence – driving dwelling investment, generating wealth and catalysing household consumption growth.

The first half of the year saw the median house price in Sydney breach the million dollar mark. Even though annual house price growth was recorded at 12.8% in Sydney, a ‘handbrake’ has been applied to the market in the second half of the year, with growth in the quarter to December 2015 recorded at -2.3% by CoreLogic and -3.1% by the Domain Group. Monthly growth was negative in December and November, the first time since May 2013 that Sydney dwelling values have dropped for two straight months.

A number of factors have contributed to this slowdown. Fundamentals – including the sustained rebound in housing supply – have continued to rebalance the market in terms of supply and demand. However, such an acute price response has arguably resulted more from unsettled buyer sentiment due to “macro-prudential tightening [and] out-of-cycle rate hikes on investor mortgages.” Credit Suisse commented on the susceptibility of the NSW market to changing consumer sentiment:

It is interesting to note that the correlation between sentiment and home sales is particularly strong in NSW but much looser in other states. The strength of the correlation, and the extreme negativity of NSW home-buying sentiment, is a worrisome development.

Looking ahead, the general expectation among forecasters is that Sydney property prices will rise in 2016, albeit at a much slower pace than in 2015. That being said, few would have predicted – at the beginning of this year – that Sydney would incur negative price growth before the end of 2015. As such, the trajectory of house price growth in the current market is near impossible to predict with confidence.