Australian House Prices Start Falling With Price Falls To Accelerate

Australia’s property market is set to break down, squeezed by the high-interest rates that are driving down home prices. While the market has held relatively well thus far, some stormy waters are ahead as price falls accelerate. Economists are expecting real estate prices to drop even more over the next year, with the Reserve Bank raising interest rates and house buyers struggling to afford the already high prices in most capitals. Declining building activity, coupled with high population growth and demand for new homes, is expected to generate another shortage of homes, which may push prices higher.

Looking at the Australian economy, the tightening borrowing rules from APRA, a potential rise in interest rates, and ongoing constraints on housing affordability are all expected to lower housing prices further than expected. On the other side of the Australian property market, many buyers are also waiting to see how the balance of rising interest rates and falling house prices play out before jumping in. Note that the RBAs model suggests a 2 per cent increase in interest rates will reduce the price of real houses by about 15 per cent over two years.

Property price forecasts

Gareth Aird, the chief economist at Commonwealth Bank Australia, forecasts property prices are likely to peak when interest rates increase and then go in reverse because prospective buyers would be able to borrow less. Among other predictions, Shane Oliver, AMP Capitals chief economist, predicts that interest rates will increase until late 2022, with about 5 per cent more value-added to real estate prices. Interestingly, the banks economists all agreed it was very likely the combined capital would see a large increase in property prices in the coming years.

Perth continues to be the world’s most affordable capital city to buy a home, and that, together with record-low mortgage rates, improved economic conditions, and public incentives are among the factors supporting renewed price growth. Real estate price growth has averaged 3 per cent a year for the past 100 years, in line with the long-term average of real GDP growth (which is a crude proxy for the long-term real income growth). Over the past 30 years Australian house prices on average increased 7 1/4 per cent a year, and during inflation-targeted periods about 7 % per annum.

Sydney has seen the biggest increase, with its established house price index rising 12 per cent (9.6 per cent inflation-adjusted) in the year to Q1 2020, followed by Melbourne (10.8 per cent) and Hobart (7 per cent). Sydney prices fell 0.5 %, while Melbourne fell 0.1 – the first quarter-on-quarter decline since the prolonged lockdown in 2020. Australia’s eight biggest cities saw home prices increase 8.1 per cent during the year to Q1 2020 (5.8 per cent adjusted for inflation), in contrast with 7.7 per cent year-on-year falls the previous year, according to data from the Australian Bureau of Statistics (ABS). House prices nationwide registered their first fall since September 2020 in May, led by month-on-month losses in Sydney and Melbourne, the nations two biggest property markets.

The average national house price

National median house prices rose by 22% last year, the fastest 12 month increase since 1989, with gains driven by record-low mortgage rates, incentives for first-timers, coronavirus-driven shifts to spend on goods such as housing, the rebound from the lockdown, lack of supply and a fear of missing out. After rising 22 percent in the last year, the average national house price is expected to grow about 1% this year, with us projecting average prices will fall by five to 10% in 2023. The Commonwealth Bank of Australia forecasts that house price growth rates will significantly slow down in 2022, before recovering in 2023.

In a sense, the adverse wealth effects from falling house prices means the slower housing cycle will work a bit of the trick for the RBA, meaning it has a decent chance of pausing its tightening (to about 1.5% cash rates) mid-next year — that in turn should cap house price falls around 10-15%.

The expected means home owners who are holding on to mortgage payments while prices rise sharply 2021-22 might be looking at re-appraising their properties in order to lock in the gains to their equity, so that the Australian property market does not get too much cooler. If people think home prices will drop, they might delay buying or selling, leading the current market to drop faster than expected. Going forward, Canberras housing market will continue to experience steady, albeit slower, property price growth, with apartments continuing to outperform Canberras house market.

Housing demand

Lower-priced properties are unlikely to do well, with little housing demand from Western Australias regions. There is the possibility Melbournes house prices might not increase as much as Sydneys as a result of a remote working culture affecting interstate migration, while closed borders also affect migration. While ANZ projects that property prices will fall 5% in Sydney and fall 2% in Melbourne by 2023, Wilson of MyHousingMarket forecasts property prices will increase in both cities as Australias economy revives.

Australias housing market has begun its descent from pandemic heights, with housing prices falling 0.11 per cent in May, accompanied by rising interest rates. While Melbourne property prices suffered due to Melbournes extended lockdown, which significantly affected market activity throughout 2020, beginning at the end of October, Melbournes housing market has recovered strongly, likely delivering between 8-12 per cent in value gains in the coming 12 months, with houses gaining ground on apartments. The current secular bull market for residential properties has seen property prices increase from 23% below the 1997 long-term trend to 26% above.

Indeed, the mortgage rate level was the main driver of Australian metropolitan dwelling price growth for about two decades. Intuitively, since the majority of housing purchases are undertaken with borrowed money, it seems reasonable to assume that changes in debt-to-income ratios will capture a greater proportion of the effect that changes in the interest rate have had on dwelling price growth.

Feature Image by anjumansharma from Pixabay