More than a year on from the end of the property price boom and home values continue to tumble, auction clearance rates are down, and demand for mortgages has hit a four-year low.

But are Sydney and Melbourne in the middle of mild downturns, or is this the beginning of a full-blown crash?

Last month AMP economist Shane Oliver downgraded his housing market forecasts to “top to bottom falls of around 20 per cent as credit conditions tighten, supply rises and a negative feedback loop from falling prices risks developing”.

Insurance firm QBE had a different take, predicting a “soft landing” for the housing markets in both cities.

On Tuesday, asset management firm UBS released a note titled ‘Catching a falling knife’, outlining five potential scenarios for the housing market, economy and banks, ranging from “through the worst” to “deep recession and mis-selling”.

UBS analyst Jonathan Mott pinpointed scenario three “housing correction”, with estimated peak-to-trough declines of 10 per cent as the most likely.

What constitutes a crash?

“It’s a bit like defining a recession, there’s no agreed definition,” University of Sydney economist Cameron Murray said, when asked whether the major markets are approaching crash territory.

Sydney is currently leading home value falls with a 7.4 per cent fall in dwelling values over the past 12 months according to CoreLogic, while Melbourne has experienced lesser declines of 4.7 per cent.

Dr Murray is keen to point out that “the boom was not that broad”. While prices soared in Sydney and Melbourne, and are up 9.7 per cent annually in Hobart, the end of the mining boom in 2014 saw Perth and Darwin hit with ongoing price declines that they’re yet to bounce back from.

Sydney property has fallen 7.4 per cent in value over the past year, while Melbourne has seen a drop of 4.7 per cent. Photo: Getty

The downturn in the two major cities is in its “early days”, but Dr Murray isn’t worried the cooling major property markets will lead to widespread economic catastrophe.

“You could do nothing and it could be quite catastrophic. But politically no one’s going to do nothing,” he said.

“For example during the financial crisis, everyone knows what [the fiscal stimulus by then-treasurer] Wayne Swan did. If things get really bad there will be money flowing left, right and centre.”

“I don’t think it’s at crash status,” CoreLogic national head of real estate Geoff White told The New Daily.

Home values as at October 31, 2018. Source: CoreLogic

The decline in home values and clearance rates – the number of homes selling at auction on a given weekend – since the major markets peaked over a year ago has been “fairly gradual”, according to Mr White.

“We started [2018] with Sydney clearance rates in the 60 per cents, and now they’re down into the 40s. It’s been a gradual slide over the course of the year,” he said.

Mr White attributes the fall to a lack of buyer confidence, an increase in stock levels, and a crackdown on home loan lending by the Australian Prudential Regulation Authority.

Credit squeeze

APRA’s credit tightening has “definitely slowed the market, as a consequence buyer confidence is down,” Mr White said.

“Interest rates are still low, economic growth still there. This [market downturn] is clearly driven by a different criteria – the availability of credit,” he said.

Mr White is careful to temper that assessment with a reminder of the “enormous growth” seen in Sydney and Melbourne over the past five years.

Home values in Sydney skyrocketed by 64.4 per cent over the five years to January 2018, while Melbourne prices shot up by 56.4 per cent, according to CoreLogic.

“It’s a realignment of the market. I don’t think it’s crash material,” Mr White said.

While the downturn in Sydney and Melbourne was “always going to happen”, unnecessary intervention by APRA has made it “bigger than anyone forecast”, according to Propertyology director and market analyst Simon Pressley.

Mr Pressley is angry at the “unintended consequences” of APRA’s credit tightening, which began in 2014, and believes the regulator owes the nation an explanation.

“We’ve been consistent in saying no intervention is required, let market forces do what they do,” he said.

The winners – and the losers

While long-time home owners have enjoyed extraordinary capital gains from the recent price boom, those who got into the market in the past year – including first-home buyers spurred on by stamp duty concessions introduced by Victorian and NSW state governments in mid-2017 – haven’t been as lucky.

“If you bought a property in Sydney or Melbourne in 2013 and 2014 you’re not going to be worried. It’ll still be worth a lot more than what you paid for it,” Mr Pressley said.

However, Sydney buyers who got into the market a year ago will have a “sick-in-the guts feeling” looking at houses and apartments at “mid-2016 prices”.

“You’re now sitting on something worth less than what you’re paying for it, and it’s costing you roughly $30,000 a year to pay off. You’ve got to find that each and every year, no matter what the value does,” he said.

“You can be talking seven to eight years until the next growth cycle starts. That’s the risk a buyer takes when they buy at the back end of the growth cycle.”

Opportunities for buyers to nab a bargain

While “certainly not ideal” for vendors, the current market is “one of the best opportunities for buyers to get in and buy a property” at sub-2017 prices, according to Mr White.

“Any buyer that’s been waiting for the market to come off has evidence to say it has over the course of the year,” he said.

However, he cautioned buyers against trying to time the market.

“Buyers always want to buy at the bottom of the market, but how do you know when it’s reached that point?” he said.

“Buying property should be a long-term investment, and this market won’t continue forever.”

According to Mr Pressley, “the best time to invest is always as soon as you can afford it”.

“It’s never about when, and always about where,” he said.

While the decline in Sydney and Melbourne will “continue for some time”, investors are now turning their focus to regional areas or “mini-capital cities” with “economic diversity” and “all the essential infrastructure”.

“Housing prices are much more affordable and the tsunami of residential construction in big cities largely hasn’t occurred in non-capital cities,” Mr Pressley said.

“There’s plenty of opportunity for those looking to invest and not follow the conventional path.”