Housing prices in major urban cities such as Sydney and Melbourne are projected to fall by as much as 4% this year, according to the latest study from property analysis firm SQM Research.

This is a complete reversal of its previous forecast that Australia’s two most expensive cities would see their prices soar by at least 4 to 8%.

SQM says the Sydney and Melbourne property markets are overvalued by at least 455, according to its comparison of nominal aggregate incomes to housing prices.

It expects “this overvaluation to wind down somewhat over an extended period of time”.

Its new downgraded forecasts for five capital cities are:

  • Sydney -4 to 0%
  • Melbourne -3 to 1%
  • Darwin -5 to 0%
  • Brisbane 0 to 3%
  • Canberra 1 to 4%

But its projection for Adelaide (0 to 4%), Hobart (8 to 13%) and Perth (1 to 4%) remains as is.

Not expecting a “housing crash”

SQM now sees prices across Australia’s capitals, on average, to fall by 2% (at worst), or rise by 2% (in the best case scenario) this year.

The firm’s managing director and the man responsible for the report, Louis Christopher, thinks more stringent lending standards to lessen borrowing risks “is now affecting the national housing market as a whole”.

“This action, predominantly targeted at property investors, has triggered a decline in demand for residential property.”

But he emphasised that SQM was not expecting a “general housing price crash” in 2018 since the economy is overall “healthy”.

In particular, he said this was because of “relatively low and stable” unemployment (at 5.5% in March) and population growth being “very strong”.

Even if the downturn becomes worse, SQM thinks the Reserve Bank plus the state and federal governments would step in to “stabilise the market”.

Sydney and Melbourne market deteriorates

There were a number of major factors that caused SQM to amend its initially glowing projections.

“Leading indicators such as auction clearance rates, total aggregated property listings and asking prices suggest further deterioration in market conditions in recent weeks,” Christopher said.

The number of Sydney property listings has soared by 34% over the year. He said they are “now at similar levels recorded in 2011 — a point in time when Sydney dwelling prices fell 3 per cent for the year.”

Despite that, Sydney’s auction clearance rates have dipped to the low-to-mid 50% range, Christopher noticed.

He said “the clearance rate may have dropped further to below 50 per cent” in late April. “These are levels which, historically, have translated into price falls.”

Sydney vendors have also had to capitulate and reduce their asking prices (-1.1pc for houses, and -0.6pc for units), which would most likely result in a “negative pricing result” for the June quarter.

Christopher took note of weaker trends in the Melbourne market, but said it was “a little stronger than Sydney”.

“Asking prices, after rising at year-on-year levels of up to 22 per cent, have slowed in pace to an annualised rate of 5 to 7 per cent.”

Brisbane and Darwin downgrade

Brisbane — which was set to see housing prices rise by 3 to 7%— is now headed for a 0 to 3% gain at best, according to SQM.

“Building approvals [in Brisbane] are falling and this will eventually help absorption levels of existing surplus stock,” Christopher said. “However, given the slow investor take up, it will take many months before the market returns … to equilibrium.”

The worst-performing city is Darwin, which is set to drop by up to 5%, and remain flat.

Darwin has already suffered a four-year housing downturn and SQM thinks there is still room for prices to plunge some more.