Source: API Property Journal
AUSTRALIAN house prices are falling at their fastest rate since the early 1980s recession, and rising interest rates could see 30% wiped off values.
Values fell by 1.3% in July, marking the third consecutive drop for CoreLogic’s national Home Value Index. After prices surged 28.6% through the pandemic growth phase, they are now 2.0% below the April peak.
Five of the eight capital cities recorded a month-on-month decline, led by Sydney and Melbourne where values fell 2.2% and 1.5% respectively. Brisbane, down by 0.8%, fell into negative growth territory for the first time since August 2020, while Canberra and Hobart were down 1.1% and 1.5%.
Perth, Adelaide, and Darwin saw modest rises but have seen a sharp slowdown in the pace of capital gains since the first interest rate hike in May. The official cash rate, which has quickly risen from 0.1% to 1.35%, is expected to be lifted again when the Reserve Bank of Australia board meets today.
CoreLogic’s research director, Tim Lawless, said housing market conditions are likely to worsen as interest rates surge higher through the remainder of the year.
“The rate of growth in housing values was slowing well before interest rates started to rise, however, it’s abundantly clear markets have weakened quite sharply since the first rate rise on May 5,” he said.
“Although the housing market is only three months into a decline, the national Home Value Index shows that the rate of decline is comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s.
“In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years.
“Due to record high levels of debt, indebted households are more sensitive to higher interest rates, as well as the additional downside impact from very high inflation on balance sheets and sentiment.”
Interest rate rises could slash 30% off prices
AMP Capital’s chief economist Shane Oliver said the key drivers of the downturn are poor affordability, rising mortgage rates with fixed rates having gone up two to three fold from around 2% to around 6% and variable rates now rising rapidly, a rise in new listings in Sydney and Melbourne, a rotation in household spending from goods back to services, cost of living pressures making it harder to save for a deposit, and a collapse in consumer and homebuyer confidence.
“But the main driver of the slowdown so far is the surge in mortgage rates – being able to borrow at a fixed rate of 2% or less was a key driver of the boom in prices with fixed rate lending accounting for 40 to 50% of new lending about a year ago. But with fixed mortgage rates now up nearly three-fold from their lows and variable rates rising rapidly this has substantially reduced the amount new home buyers can borrow and hence their capacity to pay. As a result, the rug has effectively been pulled out from under the property market.”
AMP Capital maintained its forecast of a top to bottom fall of 15 to 20% for house prices. This would materialise through 20% falls in Sydney, Melbourne and Canberra, 15% falls in Brisbane, Adelaide and Hobart, and five to 10% in Perth and Darwin – assuming the cash rate tops out at 2.6%.
“The main downside risk to our forecasts would be if the cash rate is raised to the 3.5% or so that some and the money market are assuming – this would more than double average household interest payments and push total (interest and principal) mortgage repayments to record highs relative to household income and drive a 30% or so fall in prices.
“Expanded access to home deposit schemes, the federal government’s “Help to Buy” scheme, NSW first home buyers swapping stamp duty for land tax next year, the tight rental property market and rising immigration levels will ultimately help to provide a floor for property prices but for now the property market will be dominated by the cyclical impact of rising interest rates.,” Oliver said.
Regional markets soften
The regional markets index recorded its first monthly decline since August 2020, down 0.8%. Dwelling values were down across regional NSW (by 1.1%), regional Victoria (0.7%), regional Queensland (0.7%) and regional Tasmania (0.6%), while values continued to trend higher in regional South Australia (up by 1.1%) and regional Western Australia (0.1%).
Dwelling values across CoreLogic’s combined regionals index were up 41.1% from the pandemic trough to the June peak, compared with a 25.5% rise across the combined capitals index. Lawless said the stronger growth reflected a significant demographic shift towards commutable regional markets, which is likely to have some permanency as more workers take advantage of formalised hybrid employment arrangements.
Most of the major regional centres adjacent to Sydney, Melbourne and Brisbane – such as Illawarra, Newcastle and Lake Macquarie, the Southern Highlands and Shoalhaven, Geelong, Ballarat, the Gold Coast and Sunshine Coast, recorded a decline in home values over the three months to July, marking the end of nearly two years of significant capital gains.
Unit values across the combined capitals are generally recording smaller falls relative to house values, down 1.0% and 1.5% in July respectively.
“This trend is most apparent across the three largest capitals as well as Canberra, where housing affordability challenges may be deflecting more demand towards the medium to high-density sector,” Lawless said.
“Additionally, firmer interest from investors should favour the unit market over houses where demand has historically been more concentrated.”
