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Rising interest rates to usher in a period of downturn for Australian property

May 29, 2023
Andy Webb

The past two years have been a remarkable time for the Australian property market, and we're now entering another phase of change after the first of potentially many interest rate rises. 

Despite some markets continuing to exhibit strong growth, others are slowing or even going into reverse, and interest rates are likely to dictate a decline in property prices over the next 24 months. 

This month we'll look at what all of this means for buyers and sellers, and where things could end up by the end of 2022. 

National home values: April 2022

So far this year we've seen multi-speed market conditions exacerbated as different cities and regions bring some very different results to the table. 

April has presented another month of mixed results for the capital cities. Source: CoreLogic

CoreLogic's latest report shows that Sydney home prices fell again in April by -0.2 per cent, with Melbourne values remaining unchanged. 

The median value of a Hobart home also dropped -0.3 per cent, the first fall the city has seen in nearly two years. 

Meanwhile, in the country's two hottest markets, Brisbane and Adelaide prices soared once again by +1.7 and +1.9 per cent respectively. 

Perth, Canberra and Darwin also charged ahead in April, posting upticks of around +1.0 per cent. 

Looking to the regions, a long and strong period of growth is cooling slightly. Even so, +1.4 per cent gains for regional markets collectively is still a very strong result, with QLD, SA and Tasmania posting standout results. 

On the national level, +0.6 per cent growth for April is the smallest monthly rise since October 2020. Considering current market conditions, that number is likely to fall further in the coming months. 

Interest rate hikes will dictate how far prices fall

Earlier this week, in the face of surging inflation, the RBA rose the cash rate for the first time in over 11 years. That move came much sooner than many economists were expecting. 

Rates have now risen from 0.10 per cent to 0.35 per cent, and that's only the beginning of the cycle. Should rates push beyond 2.0 per cent, as many experts are forecasting, it's going to have a major impact both on what buyers can borrow and what property prices they'll be seeing out there in the market. 

CoreLogic's head of research Tim Lawless explained "we are likely to see a further loss of momentum in housing conditions over the remainder of the year and into 2023."

The start of a "rapid tightening cycle" from the Reserve Bank could begin to undo a sizeable chunk of the massive gains that typified the 2021 housing boom. 

The big unknown at this point is how fast and how high interest rates do rise. What seems certain, though, is that we're in for a widespread market downturn. 

Sellers may be inclined to list sooner rather than later to lock in the gains of last year, while buyers will need to weigh up their borrowing power and the expense of increasing mortgage rates with a downward trend in home prices.

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Listings are still dictating price growth between markets

Interest rates aside, it's supply and demand that continues to determine the strength of different markets. 

While new listings have dipped on a national level, there's a big divide in the amount of available housing stock in each city and region.

Both new and total listings have taken a dip in April. Source: CoreLogic

In Brisbane and Adelaide, total stock on the market is around -20 per cent below where it was 12 months ago and -40 per cent down on the five-year average. Supply simply can't keep up with demand at the moment, and that's driving prices up further. 

It's a different story in Sydney and Melbourne. Sydney listings have returned to average levels, while Melbourne stock is up +8.2 per cent on the five-year average. That's allowed buyers to be more selective and patient, thus stunting price growth. 

Total stock on the market is having a clear effect on price growth. Source: CoreLogic

"With higher inventory levels and less competition, buyers are gradually moving back into the driver's seat," Mr Lawless explained. 

Overall, listings are trending upwards while buyer demand is reducing, and that's pushing things towards a more balanced market dynamic. If that trend continues, buyers may find themselves holding a bit more power later into 2022.

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'Insulated' regional markets continue to power on

While we're seeing a mixed bag in terms of growth in the capital cities, regional markets have remained consistently strong across the board. 

Broad-based growth has continued for the regions in April. Source: CoreLogic

Much like Brisbane and Adelaide, a lack of listings has been one of the key drivers of this continued growth. According to CoreLogic's data, available stock is -42 per cent lower than the five-year average. At the same time, demand remains high, with sales volumes +20 per cent above the same average. 

Despite all this, the rate of growth in the regions is still trending downhill. 

Regional markets are beginning to track downwards. Source: CoreLogic

The report points out that regional markets have been insulated from some of the factors cooling the capital cities, but interest rate hikes will have an impact across the board. 

One key difference, though, is affordability. As regional markets represent a more affordable option for housing, they may appeal to more city buyers looking for more space and better bang-for-buck as their borrowing power decreases. 

What comes next for Australian property?

This week, and likely for some time to come, all eyes are going to be on interest rates. 

The CoreLogic report noted that historical data shows a clear correlation between interest rate hikes and softening property prices. 

“Although we are expecting the housing market to move into a downturn through the second half of the year, it is important to remember the context of the recent growth phase," Mr Lawless said. 

“Since the onset of the pandemic, national housing values have increased by +26.2 per cent, adding approximately $155,380 to the median value of an Australian dwelling.”

The report also pointed to RBA messaging that raising the cash rate by +2 per cent may result in home values dropping by as much as -15 per cent. At this point, a rise to that level—or even higher—doesn't seem outside the realm of possibility. 

For a bit of perspective, if property prices fall that far, that would wind them back to the level they hit in April 2021. 

Buyers will need to keep a close eye on where rates go from here as well as how much property values are impacted. If borrowing power decreases and mortgages become expensive, that may be balanced out by a reduction in the cost of real estate. 

On the seller's side of things, those looking to achieve a top sale price could be safer making a move sooner rather than later to lock in the growth experienced over the past 15 months.

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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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