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July 28, 2023 by ash

The rapid increase in Australian property prices during 2020 and 2021 is well known to anyone who has sold or bought a property in recent years. While the RBA lifted the cash rate and mortgage rates increased over much of 2022, property prices fell, even dramatically in some markets. CoreLogic’s Home Value Index recorded a slight rise of .6% across all capital cities in March and a rise of .5% in April-the first such rises in 11 months. Many property experts are already predicting the end of the property slump as prices remain above pre-pandemic levels.

The director of research at CoreLogic, Tim Lawless, noted at the release of the Home Value Index in May that net migration and a shortage of inventory likely contributed to the housing market’s recovery.

“Through the downturn, many prospective vendors have stayed on the sidelines, keeping inventory levels low and giving sellers some leverage at the negotiating table,” Lawless said.

It is believed by many buyers that the rate hike cycle is nearing its end.

It may be contributing to a general perception that the market has bottomed out, and that it’s a good time to buy, according to him.

It is likely that consumer sentiment will improve as interest rates stabilize, which will increase buying and selling activity in the housing market.”

Due to its high housing debt ratio, Australia was recently ranked as the second-highest country for “housing market risk” among 27 countries.

It is widely believed that the property market will crash in the near future. We spoke to two experts to find out their opinions.

A Covid-led Boom

Australian properties are still extremely expensive, despite the fact that they have become more affordable since the pandemic.

The Australian housing market reached its peak in April 2022, when it had risen by about 30%, says Eliza Owen, Head of Research, Australia at CoreLogic. Between late 2020 and early 2022, regional Australia experienced an upswing of about 40%, while capital cities experienced an upswing of about 25%.”

According to Owen, the boom was largely fuelled by emergency low interest rates during the Covid-19 pandemic, which reduced borrowing costs, and by a strong recovery with high demand, low unemployment, and high levels of savings.

The housing market was also buoyed by some preference shifts that occurred during the pandemic, including increased demand for holiday houses, tree-changers moving to regional areas, expats returning, and people wanting more space or their own space after lockdowns.

So Will the Property Market Crash?

Australian capital cities’ housing markets fell by -5% in 2022, according to Domain figures. In Sydney, house values declined by -10.9%, and in Melbourne, they fell by -5.9%. In Canberra and Brisbane, they declined by -6% and -1.1%, respectively.

By the end of spring selling season, most of the damage had been done. Between early 2022 and November, Australian combined capital city property prices fell 6.5%, according to CoreLogic figures.

However, Owen does not consider this a crash.

In my mind, a housing market crash is defined by the loss in value and a loss in mortgage serviceability, when people can’t service their mortgages, and they have to sell, but they can’t get enough money to pay off the loan when they try to sell.” We’re not seeing that right now.

Although the property market was in a downturn over the latter half of 2022, Kilroy says a crash is unlikely due to strong economic fundamentals. The first is demand, with high rents and the return of overseas migration resulting in more buyers. On the supply side, low unemployment is limiting the number of properties for sale, with distressed sales not yet evident.

Check out this article for more information: How to beat the rate hikes

The Impact of Rate Rises

Last year’s property market downturn was largely caused by rising interest rates, according to Kilroy. There is a credit availability issue driving this downturn, rather than an increase in unemployment or oversupply.”

After raising interest rates ten consecutive meetings beginning in May of 2022, the Reserve Bank of Australia raised the cash rate to 3.6% in April before holding it steady.

According to Owen, this is the fastest rate increase since the early 1990s as a result of extremely high inflation levels. A major cause of this correction in housing values has been the rise in interest rates, so this has essentially reversed the upswing in housing prices.”

Is 2023 going to be a year of rate declines?

What Is in Store for the Property Market?

In Owen’s words, “prices will continue to fall as long as interest rates rise”. Her research indicates that the magnitude of the declines has moderated in recent months, with a national drop of 1.6% in August slowing to a fall of 1.2% in October. Over the past few months (of last year), there has been a slowdown in the pace of decline, and an orderly trend is beginning to emerge.”

Then, of course, there was the slight rise in CoreLogic’s dwelling values in March of .6% and .5% for April, indicating that we may have reached the bottom of the falls.

Owen says the best guide for the housing market outlook is the cost of debt, with property prices likely to increase once interest rates start to fall, something Kilroy is expecting in either the last quarter of 2023 or the first quarter of 2024.

However, Kilroy adds that since the boom was fuelled by the unique circumstances of a global pandemic, property prices aren’t expected to bounce back to their previous highs in the short term, as interest rates are unlikely to fall as far. She is forecasting any fall in interest rates to bottom out at around 2.6%.

How Far Will Prices Fall?

“We’re expecting a nationwide dwelling peak-to-trough price fall of 11.5%, and we’re expecting that trough to be met in the second half of (2023),” Kilroy says, adding that BIS Oxford Economics forecasts are “at the low end of the scale compared to some commentators”.

However, the same falls will not be experienced universally.

“We’re forecasting a 13% fall for houses and 8% for units, and we’re forecasting Sydney to have the greatest fall in house prices of around 18%, while we have Perth houses at the other end of the scale with a more modest 4% drop.”

While CoreLogic doesn’t make forecasts, Owen says that the Big Four banks are tipping combined capital cities prices to fall by a median of 16%. “Based on the forecasts, this could be one of the largest housing market downturns that we’ve observed, but this is coming off the back of one of the biggest upswings we’ve observed in Australia’s housing market as well.”

However, by late April, ANZ had updated its forecast, downgrading its prediction of a peak-to-trough fall from 16% to 10%. In May, the big four all released revisions of their earlier housing price predictions, reneging their previously pessimistic takes.

Domain economist Dr Nicola Powell said there were signs that the bottom had been reached, and the turnarounds of the banks could be a strong indicator.

“This could very well be the bottom of the market, but we need another couple of quarters of sideways movement of prices, or slight improvements, before that is confirmed,” she said.

Whether this is the bottom or the beginning of another boom is yet to be seen, and, alike to the economists, the banks are split: CBA predicts prices to rise 3% in 2023; NAB expects a slight fall in the year; ANZ and Westpac say the market will be mostly flat for the rest of the year.

Is Australian Housing at Risk?

Most recently, the IMF released a report, A Rocky Recovery, that ranked Australia second only to Canada in relation to housing risk. It did so after looking at five key metrics:

  1. Outstanding housing debt to household income in June last year. Australian housing debt is roughly 145.4%, of the country’s total disposable household income.
  2. The share of housing debt on variable interest rates. Around 70% of loans are variable in Australia.
  3. The share of home owners with a mortgage—around 37%.
  4. Cumulative cash rate changes from March 2020 to September 2022. The RBA has hiked rates 10 times since April last year.
  5. Real house price growth between March 2020 to March 2022, which in Australia amounted to a pandemic surge of about 25%.

Commenting on the IMF report, Owen said that while the ranking is sobering, there is reason for optimism.

“Many households have accrued strong savings buffers through the low interest rate period, and labour markets remain extremely tight,” Owen said.

“Housing market conditions are turning a corner amid low stock levels, rising demand from overseas migration, and consumer sentiment shifting higher as we approach what may be the end of the rate-tightening cycle.”

As the IMG said in its report: “In most cases, it is unlikely that an ongoing fall in house prices will lead to a financial crisis, but a sharp drop in house prices could adversely affect the economic outlook.”