Sydney property prices are tipped to pull back by up to 10 per cent over the next 12 to 18 months, experts warn, after real estate markets ended the year with a whimper.
The harbour city is leading the country's property downturn, with prices falling 0.9 per cent in December. Prices were down 2.1 per cent for the quarter, well below price growth of more than 17 per cent in mid-2017, said the head of research at property research data group CoreLogic, Tim Lawless.
Sydney property prices are now 2.2 per cent below the market's peak in August 2017.
The median house price in the harbour city is now $1,058,306, with a median apartment value of $774,124.
"Sydney's housing market has become the most significant drag on the headline growth figures," Mr Lawless said, with capital cities down 0.4 per cent on average over December.
The lacklustre results were expected to continue over 2018, which was "likely to be significantly different" to the boom cycle of the past few years, Mr Lawless warned.
"We're likely to see lower to negative growth rates across previously strong markets, more cautious buyers, and ongoing regulator vigilance of credit standards and investor activity," he said.
"There's going to be a negative growth rate, probably most similar to the 2000 to 2003 [time period] when prices fell by about 7 per cent."
Other experts are predicting declines for Sydney of between 3 and 10 per cent. Sydney recorded 3.1 per cent growth in the year to December 31.
Mr Lawless expected the market's slide from "peak to trough" to take 12 to 18 months. "The market peaked in August for Sydney, so we've already seen four months of the slowdown."
Joanne Seve, a Sydney lawyer and specialist in state-based taxes said the predicted market decline would be "really bad news for NSW revenue".
Transfer duties, including transactions of all kinds, amounted to slightly less than $1 billion in November, government statistics show. In the same month last year, they were worth $1.85 billion.
The state government itself, in a budget review mid-financial year, projected a near $650 million decline in stamp duty revenue.
But Ms Seve said the effect of a falling property market on the state's bottom line could be much greater.
"It will also affect future projections of land tax revenue in NSW [which are based on a three-year average]," she said.
Land tax is worth about $3 billion to the state and stamp duty nearly three times as much as Sydney's property market grows.
But the state government, which is fond of boasting of its $5-billion plus surplus, denied such a downturn was likely to affect the state's budget position.
"Thanks to our government's fiscal discipline, our strong financial position and our diversified economy, NSW is well positioned to deal with changes in market conditions," Finance Minister Victor Dominello said.
"Residential stamp duty revenues make up only 9 per cent of total revenues, with 91 per cent of revenue coming from other sources such as GST payments, Commonwealth grants and payroll tax."
Acting Opposition Leader Michael Daley accused the government of being dependent on Sydney's property market.
"Any significant downturn could be put the budget and public services at risk," he said.
"We have yet to hear of the government's plan B because it doesn't have one. "
With household debt at record highs, Mr Lawless expected to see regulators and policymakers encouraging home owners to reduce debt levels while interest rates were low, and warned that future borrowers, particularly investors, "may find securing a mortgage won't get any easier in 2018".
Relatively affordable regions, such as the Central Coast and the south-western suburbs of Sydney were better placed than the inner suburbs to hold their value due to interest from first-home buyers, he said.
"While the headline figures are set to weaken, below the surface the individual cities and regions of Australia will continue to operate under their own distinct cycles which are subject to more localised forces of demand and supply," Mr Lawless said.
High migration was likely to remain a key driver of housing demand.
Low interest rates and support for first-home buyers "are providing some support and should help ensure only moderate price falls," AMP Capital chief economist Shane Oliver said in a research note describing a crash as "unlikely".
He predicted Sydney prices would fall by about 5 per cent over 2018.
BIS Oxford Economics senior manager residential Angie Zigomanis expected prices could fall as much as 10 per cent in Sydney over the next two years in a "worst-case scenario" though said a 3 per cent decline over 2018 was more likely.
This was largely thanks to the restrictions placed on investors by the Australian Prudential Regulation Authority, putting a "handbrake" on these buyers.
"Investors are a big contributor to price growth in Sydney and this will stop them from paying the premiums they have in the past," he said.
The annual number of sales can drop by up to a quarter from peak to trough in a property cycle.