Reading the headlines of recent weeks will have you believe that a big change to the property market is on its way, with Australian house prices set to crash up to 20% in the next 12 months.
In a world full of content and news, it’s understandable that oftentimes the media pushes for attention grabbing headlines, and aims to validate their position with any signs and statistics.
With the RBA’s announcement on Tuesday of another half percentage interest rate hike to 1.35% and clearance rates falling in the biggest property markets of Sydney and Melbourne, there is no shying away from the fact that we find ourselves in a changing market, much different to the red hot market of 2021.
While scary statistics and doom and gloom headlines dominate the news, it helps to look objectively at what’s happening now in the market to support your decision making in the next few months.
Where are Australian house prices currently?
CoreLogic’s Hedonic Home Value Index for July recorded a second consecutive month of value declines in June, with national home values continuing their downward trend at -0.6% month on month. Annually, national home values are still up 11.2%
Across Australia, we’re currently witnessing multi-speed conditions, but every market is seeing a reduction in the trend rate of growth.
|Region||3 months to June 2022||Region Peak rate of growth (3 month)||Month of peak growth|
What makes house prices rise and fall?
In order to fully understand if house prices will in fact ‘crash’ this year, it helps to take a look at the factors that drive house prices in order to prepare for whatever market we find ourselves in.
1. Interest rates
On a national level, house prices highly correlate with interest rates. It goes without saying that when it becomes more expensive to pay off a loan, people can borrow less. In cities such as Sydney and Melbourne, buyers are particularly sensitive to interest rate changes, primarily because of high debt levels.
CoreLogic Research Director, Tim Lawless, noted the housing market’s sharper reduction in growth coincides with the May cash rate hike:
Housing value growth has been easing since moving through a peak in March last year, when early drivers of the slowdown included rising fixed term mortgage rates, an expiry of fiscal support, a trend towards lower consumer sentiment, affordability challenges and tighter credit conditions,” he said.
More recently, surging inflation and a rapidly rising cash rate have added further momentum to the downwards trend. Since the initial cash rate hike on May 5, most housing markets around the country have seen a sharper reduction in the rate of growth.
“Considering inflation is likely to remain stubbornly high for some time, and interest rates are expected to rise substantially in response, it’s likely the rate of decline in housing values will continue to gather steam and become more widespread.”
2. Housing supply
House price growth is also closely tied to housing supply. When demand is strong, as is the case during record low interest rates or population growth, house prices will rise due to the shortage in supply. We saw this most recently in regional areas that experienced a ‘lifestyle’ housing boom when many flocked to the regions in search of more affordable housing as many workplaces began to allow remote employment.
Housing supply also impacts affordability; the record price growth experienced across Australia of 2021 has pushed home ownership out of reach for many. As with many things to do with the property market, it’s complicated. With international borders reopening and the cost of construction rising, supply remains constrained and we still remain locked in a relatively muted housing supply situation despite rising interest rates.
3. Access to finance
In anticipation of rising rates, the Australian Prudential Regulatory Authority (APRA) increased the interest rate buffer on mortgages last year. This means new borrowers must show that they can pay at an interest rate that is at least three percentage points above the loan product rate when assessed for a home loan by a lender. Restrictions to finance can cause property price growth to falter.
In addition, high inflation can also weigh on housing demand, as households are likely to be saving less as they spend more on essentials such as food, fuel and shelter. Mr Lawless says:
Lower savings and higher expenses along with rising interest rates will have an ongoing impact on borrowing capacity for households. Reduced borrowing capacity is likely to further diminish housing demand and potentially deflect more home buyers towards the middle to lower end of the pricing spectrum.”
At the present time, restrictions to finance still remain relatively low.
4. Consumer sentiment
While interest rates rises have had an almost immediate effect on the trajectory of house prices, consumer sentiment toward property also has an impact. We have come well away from the red hot seller’s market of 2021, where house prices skyrocketed and clearance rates held steady at high percentages. The market has begun to turn tide to favour buyers, who now have more choice and leverage.
CoreLogic estimates home sales nationally through the June quarter were -15.9% lower than a year ago, but are still holding 13.0% above the previous five-year average. While sales activity continued to remain above average throughout the June quarter, that could change as demand cools and lenders become more cautious in their approach toward buyers.
5. Economic growth
In a strong economy with a tightening labour market and high employment, people are less worried about losing their jobs, and with it, the ability to pay off their home loans. Through the recent pandemic, house prices initially declined, but bounced back quickly to record highs once people realised the economic downturn was short lived.
A strong labour market will also be the key factor in keeping distressed listings off the market, although a key risk for the housing market would be any loosening in labour markets, which could be triggered if the cash rate moves too high, too fast, reducing economic output.
How much could Australian house prices fall?
How far housing values could fall in the next few months remains highly uncertain, despite what seems to be commonplace in media headlines.
Taking into consideration all the factors that could affect Australian house prices in the next few months, it’s worth taking into account the things that we do know are happening.
Australia’s international borders are reopening, and the country's migration program will soon resume and see new people flooding (up to 160,000 per year) into the country for personal and professional reasons. They will all need somewhere to live - either purchasing property or renting.
Soaring demand from renters and the easing of price growth is an appetizing drawcard for investors. Data from realestate.com.au shows investors have returned to the market in a big way following a period of stalling during the pandemic.
In addition, government incentives for first home buyers and home ownership will also help to prop prices and fuel demand for quality housing, with the newly elected Labor Government introducing a shared equity scheme this year.
While a peak to trough decline of more than 10% is becoming the popular opinion, it helps to take a step back to consider the context of the downturn.
Varying from city to city, and depending on recent and longer term growth trajectories:
- A 10% decline in the market would take national housing values back to levels similar to July 2021
- A 10% decline in housing values could take Melbourne home values back to September 2017 levels, but a 10% drop in Brisbane only takes values back to end of last year
- A 15% decline would take the market back to April 2021 levels
- A 20% decline in home values would take the national index back to January 2021 levels, marginally above where home values were in late 2017
Thinking of selling your home in a changing market?
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