Price Corrections


Price Correction

All property markets go through periods of expansion and contraction. In this article, we will examine what is defined as the correction or contraction period and the average correction for all 5 major capital city property markets of Australia.

A price correction is best defined as a period of time (at least 2 years) where prices underperform inflation. In some cases we also see prices soften and historically (back to 1960s) we have seen price falls in the major capital cities up to 10%. Corrections are necessary for the markets to normalise and find equilibrium after rapid price appreciation.

The most common reason for a market cycle to turn into a correction period is simply that prices are no longer affordable. Demand decreases, supply increases, speculators and investors leave the market and prices soften or in some cases fall.

Since the 1980’s, the average correction period for all 5 major capital cities has been 3.98 years - with a tight range of 4 to 7 years across the board, and prices declining on average of 5.74% (up to 11% in some cases) during this period.

Expansion and Correction Cycle

Last correction for 5 major capital cities

- Sydney’s last correction period was from 2004 to 2009 with a price drop of 5% in one year alone, during the correction period prices increased a total of 0.19%. Affordability index or AI (the measure of average household income towards the average mortgage at loan to value ratio of 80% and current interest rate) was at 57% in 2004 and went down to 36% in 2009. It currently sits at around 60%, this is a sign the market has peaked, is very unaffordable and arguably going into its next correction.

- Melbourne’s last correction was from 2010 to 2013 with a price drop of 8% in two years and 0.18% total growth over the correction period. Affordability in 2010 was at 51% and went down to 34% in 2013. Melbourne’s current AI for houses is at 44%, indicating that property prices are approaching a natural affordability ceiling.

- Brisbane’s last correction was from 2008 to 2015 with a price decline of 5.31% in one year alone. Affordability in 2008 was at 55% and went down to 27% in 2013. Brisbane’s AI is currently at 29% showing this market is affordable and still has room for growth.

- Adelaide’s last correction was from 2008 to 2015 with prices only moving 3% over the period. AI in 2008 was at 50% and is currently at 27%

- Perth’s property prices are the same as 2007, AI in 2007 was at 54% and now at 27%. This could arguably mean that the market has bottomed or is close to the end of the correction.

Corrections are part of the property cycle and every market goes through a correction at some point in its cycle. Typically when a market becomes unaffordable it's a sign that the market will need to go through a correction, and as the data has shown this period can last from 4 to 7 years. Therefore, understanding property corrections is important when making a buying or selling decision and the timing of your purchase or sale of a property can be the key to maximising your return or investment or experience significant loss of capital.

 

Francisco Gallardo
Associate Investment Advisor - Performance Property Advisory

Francisco’s role at Performance Property Advisory is to assist the acquisitions team with their property based administrative functions, from property sourcing to property purchase.