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Here's how much further Aussie property prices need to fall for you to get on the ladder

Well there is finally some air seeping out of some of the larger property bubbles around the country.

That could very well mean more younger Australians might actually be one step closer to home ownership.

Also read: Is Australia facing a sub-prime housing crash

Melbourne has overtaken Sydney as the nation’s worst-performing housing market after it recently suffered its first annual price drop in almost six years.

Darwin remains the weakest annual performer, down roughly 6 per cent, while Sydney prices are down Sydney 5 per cent on a year ago, and prices in Perth are down another 2.3 per cent.

Also read: House price falls are accelerating in Melbourne and Sydney

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So how much further do property prices need to fall to make homeownership a realistic prospect for the majority of younger Australians?

Let’s take a look.

Mortgage brokers

Whenever I’m keen to know what’s going on at the coal face of the property market, rather than speak to real estate agents, I have a chat with mortgage brokers.

Bruce Carr is an independent mortgage broker who helps young professionals into the property market in inner-city Sydney

He told me fewer potential buyers are coming through his doors – down something in the order of 10 to 15 per cent on the same time last year.

So it’s clear that the market’s cooling, because this is backed up by private and public sector data.

Also read: The REAL reason we’re seeing a property slowdown

But we’ve come a long way

In terms of dwelling prices (which include both houses and apartments), research firm SQM has estimated that, over the past 5 years, Sydney’s median house price has risen by roughly 55 per cent.

In Melbourne, prices are actually up by close to 60 per cent.

That is why fewer people are coming through Bruce Carr’s door. It’s just too damn expensive.

So where to from here?

Now we’ve all seen signs of the recent cooling in house prices.

I had a chat with John Daley about it. He’s the CEO of policy think tank, the Grattan Institute.

We agreed that while prices had recently fallen by as much as 5 per cent in some areas of Sydney, they’ll actually need to fall quite a bit further to bring large numbers of younger Australian back into the market.

Also read: Why SMSF’s could start a property market crash

Realistically we’re talking falls of anywhere between 10 and 15 per cent, on top of the 5 per cent fall we’ve already seen.

And if that isn’t enough for you, fellow Yahoo7 columnist, Stephen Koukoulas, agreed with us both, but he also added that plenty of stars still need to align for first home buyers to even have a look-in falling price falls.

What does he mean by that? Well simply that following a massive house price correction, you’d also be looking for wages to creep higher (by at least 2 or 3 per cent), unemployment to remain roughly where it is, and interest rates to stay at record lows.

That’s a big ask!

Pointy end

So there you have it, from the peak, if the median dwelling prices in Sydney and Melbourne fell by roughly 15 to 20 per cent, first home buyers may be in with a chance of signing a contract on a property… along with some other things falling into place too.

But it’s still not quite that simple.

Even if prices fell to where they were at the start of this latest boom, it would hurt the economy too much, and make homeownership for young low-wage earners impossible.

And, of course, don’t forget rising interest rates.

You see if prices fall by another 15 to 20 per cent, while more first home buyers might get over the homeownership line, they still run the big risk of not being able to finance their loans.

That is, 10 years ago, if interest rates rose by 2 per cent, it’d be a little more uncomfortable to service your loan. Now, with near record levels of personal debt, even a small rise in interest rates would push millions of borrowers into mortgage stress.

One very unfortunate reality remains. Figures from the Grattan Institute show that for the bottom 20 per cent (economically speaking) of 25 to 34 year-olds, they’ll continue to have just a 1 in 5 chance of being able to own their own home.

For the top 20 per cent, there chances of homeownership haven’t really ever budged… it remains around 60 per cent – thanks to the bank of mum and dad.

Also read: Why rental rates are the best indicator of a housing shortage

It’s a big country

Of course there are other property hotspots around Australia where prices are actually still ascending.

Given their lower base, it’s meant a generation of younger Australians are now actually benefiting from a rising property market!

Take Hobart and Canberra, for example.

Hobart’s still the best-performing market by far, with its prices surging 11.5 per cent in the past 12 months.

It’s followed, albeit not very closely, by Canberra, up 2.5 per cent. And even in Brisbane, prices have climbed by 1.2 per cent over the past 12 months.

Outlook

The still reasonably strong performance of some markets around the country goes to the heart of Bruce Carr’s thesis about how the current property market downturn in Sydney and Melbourne will play out.

He made the point, and frankly I think I agree with him, that the current declines in property prices will be limited because the falls are being driven by the tightening of credit, not demand.

During previous property market falls, demand from investors and owner-occupiers fell because they were losing their jobs or worried about the economy.

These falls are largely being driven by macro prudential rules and the tightening of bank lending standards.

That said, you can’t deny the affect that it’s had on investor appetite in the market.

The key question is how much owner-occupier interest in the market will be affected.

I mean why would you buy now… if there’s a chance you’ll get in at a cheaper price in the future? I guess first home buyers are hoping most people are going to hold out.

@DaveTaylorNews