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Australian property prices drop for the first time in 20 months

May 29, 2023
Andy Webb

Australian property prices drop for the first time in 20 months

Nerida Conisbee, Ray White Group's chief economist, recently said that "we're firmly in the next stage of the housing cycle," and CoreLogic's latest report shows precisely that. 

Now that the RBA lifted has interest rates for the first time in almost 11 years, the Australian market has responded with the first month of negative growth since September 2020. 

While there were mixed results between states, the expectation that rates will continue to rise into 2023 makes it all but certain that further price drops are ahead. 

National housing values: May 2022

After growth has cooled throughout 2022, property prices fell -0.1 per cent on the national level throughout May. 

The spread between different cities and regions is getting wider, though, as some have fallen substantially while others continue to climb.

May presented a mixed bag of results for price growth. Source: CoreLogic

Sydney and Melbourne represented the bulk of the slowdown, with home values dropping by -1.0 and -0.7 per cent respectively. 

Brisbane, which has continued to be one of the country's strongest markets, dropped off in May and only recorded growth of +0.8 per cent. The more affordable Adelaide, meanwhile, pushed further ahead with +1.8 per cent growth. 

Perth continued to rebound with a +0.6 per cent increase in prices. Hobart and Darwin also kept things in the green, gaining +0.3 and +0.5 per cent growth respectively. Canberra was more or less neutral, dropping just -0.1 per cent. 

Regional markets have been soaring so far this year, but conditions there softened as well. Combined, the regions were up just +0.5 per cent for the month. 

To get some perspective, the prices we see today are still far beyond what they were pre-pandemic in every market. 

When compared to early 2020 values, Sydney is up +22.7 per cent, Melbourne +9.8 per cent and Canberra a staggering +37.9 per cent.

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Rising rates are hitting high-priced markets the hardest

By the time the RBA announced last month that it would be raising the cash rate for the first time in over a decade, affordability pressures were already reaching extremes in many spots around the country. 

Now that the perfect storm of factors that ignited the 2021 housing boom has changed substantially, CoreLogic's research director Tim Lawless explained that this market correction was to be expected. 

"Since then, housing has been getting more unaffordable, households have become increasingly sensitive to higher interest rates as debt levels increased, savings have reduced and lending conditions have tightened," he said.

"Now we are also seeing high inflation and a higher cost of debt flowing through to less housing demand."

The two cities where affordability has hit hardest — Sydney and Melbourne — are now the two markets where prices have been first to fall off the back of interest rate hikes. 

Growth has continued to fall in Sydney, Melbourne and Brisbane, while Adelaide and Perth are still on the up. Source: CoreLogic

Considering Australian property prices rose +28.6 per cent since the low point of the pandemic, it's no surprise that a correction is going to wind things back somewhat. 

More affordable cities like Brisbane, Adelaide and Perth haven't been hit to the same degree, nor are they expected to be in the future. At this point, Adelaide and Perth are still growing at an increasing rate. 

A shortage of listings is still driving the growing markets

Despite the widespread effects of rising interest rates, supply and demand dynamics still have a major influence on how different markets are performing. 

Looking nationally, listings are -10.3 per cent fewer than they were 12 months ago, so overall there is a shortage of stock. 

New listings have bumped up, but total stock on the market is still well below average. Source: CoreLogic

In Sydney and Melbourne, though, the number of available properties on the market is slightly higher than this time last year, so buyers are finding themselves with more to choose from. 

"With stock levels now higher than normal across Australia’s two largest cities, buyers are back in the driver’s seat," Mr Lawless said. 

The story is reversed in Adelaide, Brisbane and Perth in particular, where listings are -39.5, -38.2 and -34.7 per cent below the five-year average respectively. 

Despite demand outstripping supply in those markets, Mr Lawless noted that "A combination of higher interest rates, lower rates of household saving and a potentially more cautious lending environment is likely to reduce housing demand further just as total advertised stock levels are likely to continue rising, further empowering buyers by creating increased competition amongst vendors."

Regional markets are cooling but still reporting growth

Regional Australia has mostly outperformed the capital city markets this year, but growth is now easing back. 

Every regional market saw a fall in growth rate throughout May. Source: CoreLogic

South Australia, boasting the best affordability of any state, once again came out on top for the monthly numbers, with Tasmania and Queensland following. 

Things have softened considerably in NSW and Victoria, the two most expensive states for regional properties, but both remain in the green. 

Regional market growth has been trending lower for most of 2022. Source: CoreLogic

Mr Lawless noted that, while the regions may prove more resilient than capital city markets, they won't be immune from the downward pressures of rising interest rates and poor affordability. 

"Arguably some regional markets will be somewhat insulated from a material downturn in housing values due to an ongoing imbalance between supply and demand as we continue to see advertised stock levels remain extraordinarily low across regional Australia," he said.

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What comes next for Australian property?

It's been widely expected that a correction phase for property prices would begin this year, although few predicted interest rates would begin rising as swiftly as they have. 

With the RBA saying "it's not unreasonable to expect that interest rates would get back to 2.5 per cent," it's likely that a substantial fall is on the cards as buyers are faced with reduced borrowing power and higher mortgage repayments. 

AMP Capital's chief economist Shane Oliver said that "Sydney, Melbourne and Canberra are likely to be hardest hit, Brisbane and Adelaide may hold up for a few months longer and Perth and Darwin may hold up better as Perth is only just above its 2014 high and Darwin is still below."

On the other hand, "regional prices may also continue to benefit" and "units may not fall as much as they did not go up as much," he said. 

Mr Lawless looked to Australia's strong economy as one factor that could limit losses. 

"As income growth outpaces housing values, the home deposit hurdle will gradually lessen, reducing one of the key barriers to entry for home buyers," he said.

At this point, it's all about how far and how fast interest rates do rise, a question that nobody can answer definitively.

Disclaimer: Blogs are written expressly for education purposes and content is based on the opinions of the authors or as otherwise cited.  All information is current as at publication release and we  take no responsibility for any factors that may change thereafter. Doorsteps Finance Pty Ltd and Doorsteps Solutions Pty Ltd do not accept any liability or responsibility whatsoever to any error or omission or any loss or damage of any kind sustained by a person or entity arising from the use of this information.  It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances

Disclaimer: Property reports contain property estimate data and information provided by RP Data Pty Ltd trading as CoreLogic Asia Pacific ABN 57 087 759 171 (CoreLogic) and OpenAgent Pty Ltd, which is general in nature. It is not a professional property valuation or advice to be relied upon. The actual market value of the subject property may differ. We and CoreLogic do not warrant the accuracy, currency or completeness of the data and information to the full extent permitted by law, each excludes all loss or damage howsoever arising (including through negligence) in connection with the information. You rely on the property estimate at your own risk.

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