Rates rise and prices fall while sellers retreat and buyers wait

It’s easy to see the effects of rising interest rates on housing prices. Property values were still showing modest monthly increases of around 0.3 per cent in the first months of 2022, CoreLogic’s home value index showed, but those rises came to a sudden stop after the first rate increase in May. 

Values quickly went into reverse and slipped into negative territory. After more interest rate increases with no indications from the Reserve Bank as to just how high they might go, CoreLogic’s figures now show Sydney’s house values have fallen 9.2 per cent since January. Sydney was the capital city with the biggest drop in September, losing 1.8 per cent in the month.

CoreLogic’s research director, Tim Lawless, told Domain that interest rate rises have been the main driver of falling house values: “It looks like the market was quite sensitive to the interest rate rises … Sydney and Melbourne’s markets were already slowing, but there was an inflection point after a couple of weeks in May,” Lawless told Domain’s Melissa Heagney.

The Reserve Bank’s October raising of the cash rate by 0.25 per cent to 2.6 per cent means that homeowners with a $750,000 home loan – about the size of the current average housing loan in NSW, will now pay $1030 a month more off their mortgage than they were paying in May. That’s an additional $12,360 a year that has to be found, so it’s not surprising that the latest ABS lending data showed a one-month 3.4 per cent fall in the value of home loans and a 15.1 per cent fall from 12 months earlier. 

The latest ANZ/CoreLogic Housing Affordability Report found that Australian households now spend 44 per cent of their income on repaying a new home loan. This is the highest level since June 2011 and up from 40.4 per cent in the previous quarter.

However, Mr Lawless says there are some signs the rate of price falls is slowing: “We have seen the decline accelerating, but it appears the rises in August and September have not had as much of an impact as at the start.” 

In another welcome bit of good news, the latest PropTrack Home Price Index Report, released in early October, also shows that the rate of property price falls in September has slowed. 

From their highs earlier this year, Australia’s dwelling prices were down about 3.5 per cent as of August 31. This isn’t bad news for all homebuyers, of course. CoreLogic’s head of Australian research, Eliza Owen, said that although there’s a trade-off between falling property prices and rising interest rates, some home hunters in the current market will still benefit.

“There is a trade-off in the places where the deposit hurdle has come down in the face of higher mortgage costs and higher rents. If you had a 20 per cent saving levels before prices started to decline it might mean you [now] have more of a deposit,” she said.

Those with strong savings and high household incomes who want to buy homes in some of the most desirable parts of Sydney might be the biggest winners from the downturn, according to Domain’s Tawar Razaghi. He points out that 2.5 years have been shaved off the time it takes to save a deposit to acquire a house in the statistical regions of Manly and Pittwater as home values dropped $264,013 and $204,484 respectively in those areas in the June quarter.

Keep in mind that the most recent Australian housing boom was so powerful that it made headlines around the world. In fact, for a time it made Australians the wealthiest people on earth in 2021 by raising the median wealth of the average Australian adult by $43,655 to a net worth of $420,403, according to Credit Suisse’s annual global wealth report. 

Massive price growth and an influx of high-end vendors significantly increased the number of luxury home sales in the past three years. A Ray White analysis of national sales showed there were 561 houses that sold for more than $10 million last financial year, up from 449 the previous year and 193 sales in the 2019-20 financial year. 

The analysis also showed that the median price for the top 1 per cent of the Australian property market leapt 9.9 per cent over the year to June to $4.4 million, compared to annual growth of 17.5 per cent the previous financial year.

What hasn’t gone up as much as housing prices is the average household’s disposable income. In June 2020 the average dwelling price in Australia was $689,400, about 13.4 times the average household disposable income of $51,487. In June this year the average dwelling price was 16.4 times the average income of $56,129; to get back to the same ratio as it was in 2020 would require another 18 per cent cut in dwelling prices and that’s probably not going to happen. 

Auction clearances stable

It might seem that falling property prices would have severe impacts on the auction market, but Sydney’s auction clearance rates have stabilised at a respectable level, hitting the low 60 percentile most weeks according to CoreLogic figures. 

Banks have restructured their lending policies to comply with legislative changes in a way that enables them to retain their share of the lucrative home mortgage market. Major financial institutions are now aggressively chasing customers for housing loans and credit is said to be easier for potential buyers to obtain now than it was during the last downturn in 2018, although the amount they can borrow has declined in recent months.

Ray White chief economist Nerida Conisbee said banks become more profitable in higher interest rate environments, meaning it is in their interests to encourage people to borrow money: “We see fewer auctions take place in a down market, so people will hold back and do private sales and decide not to sell, or only the best properties will go to market,” she said.

Another important factor is that vendors have adjusted their expectations and are accepting offers from bidders that are realistic rather than ‘underbidding’. AuctionWorks chief auctioneer Jesse Davidson said there has been a shift in sentiment from vendors as they adjust their expectations and become more willing to make a deal rather than holding out for high prices.

“The massive sale that happened at the neighbour’s house in November last year isn’t happening [now],” he said. “We are getting more realistic owners. In any cycle, up or down, the buyer is ahead of the vendor.”

Buyers’ agent Peter Kelaher, managing director of PK Property, says that buyers face a scarcity of properties this year: “A lot of [homeowners] are sitting on the fence ... and people are struggling to find a property to buy,” he said, adding that reduced supply could further deter activity as those wanting to move decided to wait until there was more choice.

Although spring usually brings a boost in sellers, the opposite occurred in September, Domain data shows that the number of homes listed for sale dropped 13 per cent from August. The biggest drops in listings were in the city’s more expensive markets; new listings fell at least 30 per cent year-on-year in the northern beaches, eastern suburbs and on the north shore, and fell more than a quarter in the Sutherland Shire and city and inner south.




Real Estate Institute of New South Wales chief executive Tim McKibbin said market activity in the Sydney housing market was still tracking well: “Clearance rates continue to hover around the solid 60 per cent mark. Strong results are being achieved as vendors are increasingly switched on to the new market in which buyers’ budgets are more constrained,” Mr McKibbin told realestate.com.au.

Forecasts vary

There’s no uniformity about where house prices are going in recent forecasts from the financial community, other than that further falls are expected. PropTrack’s latest Home Price Index from August tells us that our national home prices have fallen 2.7 per cent from their peak and that this has already cost all the gains from early 2022.

“Regional areas have recorded their largest quarterly price falls in a decade, but we continue to see the biggest price falls in Sydney and Melbourne, with Sydney prices now below their level a year ago,” the PropTrack report said. “All capitals are now below their price peaks, with Adelaide recording its first monthly price fall this year.”

Yet property market activity picked up in August, just ahead of the Spring selling season. PropTrack economist Angus Moore explained why this is happening: “While market conditions have changed, the fundamental drivers of demand remain strong, with unemployment very low, wages growth expected to pick up over this year, and international migration increasing.”

Financial services company Morgan Stanley has revised its forecast for Australia’s property prices, saying it now expects a nett fall of twenty per cent after previously forecasting a 15 per cent drop. It noted that this would make it the largest price decline in at least the last half-century, more than twice the previous largest correction which was 10 per cent in 2017-19.

The Commonwealth Bank’s head of Australian economics, Gareth Aird, says more property price falls can be expected as interest rates continued to rise: “House prices will keep falling until rates stop rising,” he said, predicting prices across the country will fall 15 per cent peak to trough during the downturn,

“That’s conditional on rates going up another 50 basis points; if it goes up higher it could change predictions – no one knows how high they’ll take the cash rate, including the RBA themselves, that will determine how far house prices will fall.”

Domain chief of research and economics Dr Nicola Powell said she still expects to see the seasonal lift in buyer demand that comes with spring, but felt interest would be on the ‘soft’ side:  “The opportunities are there, we have overall stock rising, greater choice on the market, and days on market are lengthening out, which means buyers can come to the market knowing they have greater time to contemplate their purchases and make the right decision,” Dr Powell said.

“For sellers, it’s a timely reminder that the market has moved and pricing your property right is important, if they want to secure a quick sale.”

AMP Capital chief economist Dr Shane Oliver forecasts that interest rates will fall in the second half of 2023, and property prices will recover, but he also said interest rates may end up higher than their pre-pandemic levels.

St George Bank chief economist Besa Deda said that rapid price growth in the first half of 2021 had stretched affordability, then that slowdown was accelerated by growing expectations for cash rate hikes earlier this year and by the rate hikes that followed. She expects demand will continue to weaken as rates climb: “Whilst you have that tightening [rate] cycle continuing, dwelling prices are going to soften, as will demand from buyers, because affordability is being impacted by higher mortgage rates,” she said.

The National Australia Bank says in its NAB Residential Property Survey Q3-2022 that dwelling prices are expected to decline by around 20 per cent across the capital cities from the peak in mid-2022. Its somewhat pessimistic report tells us that Sydney prices will fall 12.9 per cent this year, to be followed by another 9.4 per cent drop in 2023. 

Even Dr Philip Lowe, the Governor of the Reserve Bank of Australia (RBA) has offered his own opinion of where the property market’s going, saying he “wouldn’t be surprised” if Australian house prices fall by an average 10 per cent. 

Regarding the possibility of further rate hikes, Governor Lowe said in a statement attached to the RBA’s October meeting results: ““The board expects to increase interest rates further over the period ahead. It is closely monitoring the global economy, household spending and wage and price-setting behaviour. 

“The size and timing of future interest rate increases will continue to be determined by the incoming data and the Board’s assessment of the outlook for inflation and the labour market.”

Rents a big issue

There’s been a recent media focus on the high costs of renting as a growing number of tenants are finding it hard to keep up with increases in rental costs. Research from the parliamentary library commissioned by The Greens found that the average renter now has to pay an extra $62 a week more than they did a year ago – an increase of more than $3000 annually.

The research looked at 2.2 million rental properties nationally and found landlords had received an extra $7.1 billion in rental income between June 2021 and June 2022 with rents up from an average of $448 a week in June 2021 to $510 a year later, for households managed by a real estate agent. This equated to an average 13.8 per cent hike for the average renter.

As expected, Sydney leads the way in rental costs. Figures from a recent PropTrack report show that the median rental cost in Sydney is $640 per week for a home and $520 for a unit. This means that in just a year the cost of renting a home has risen by 12.3 per cent, with the cost of renting a unit rising by 8.3 per cent.

The latest ANZ/CoreLogic Housing Affordability Report says that affordability has worsened for the typical tenant who spent 30.9 per cent of their income on rent in the June quarter, up from 30.3 per cent in the previous quarter.

Data supplied by Domain to the ABC shows that advertised house rents have hit record highs this year in 85 per cent of suburbs with reliable data. This is the highest figure in two decades of data collection and a big jump from 2020 when median rents reached record highs in just 51 per cent of suburbs.

The principal agent of Laing and Simmons Merrylands, George Lattouf said although house prices are falling in some parts of Parramatta, rents are on the rise: “The market has dropped slightly in the Parramatta district, but rents are soaring. Landlords are saying now we can increase the rent after two years of COVID,” he said.

Nicola Powell, chief of research and economics at Domain, says the current rental market conditions are extraordinary: “In the June quarter, the combined capital cities recorded the longest stretch of continuous rental growth on record and the biggest yearly jump in rent since 2007,” Dr Powell says.

“We saw house rents across the combined capitals notch a fifth consecutive quarter of increasing rents. For units, it was the fourth consecutive quarter.”

Total rental listings are roughly a third lower than pre-pandemic levels, and data from PropTrack shows that rental properties Australia-wide are being leased faster than ever before. The number of days for a rental property to be leased after it was listed on realestate.com.au in July hit a low of 19 days across Australia.

According to a recent report from real estate agency McGrath, many cities and regional areas of Australia are facing a rental crisis: “A long-running downturn in investment activity has contributed to a shortage of rental stock, as has higher demand from overseas migration, which is expected to keep upwards pressure on rents.

“Property professionals who took part in a NAB Residential Property Survey expect rents across the country to grow well above average levels in 2022-23, and with average growth in rents over this period set to outpace house price growth” the McGrath report said.

CoreLogic's data shows that nationally, rents rose 0.6 per cent in September - the smallest monthly increase in rents since December 2021, according to CoreLogic's Tim Lawless: "A gradual slowdown in rental growth in the face of such low vacancy rates could be an early sign that renters are reaching an affordability ceiling," he said.

Land tax on its way?

NSW premier Dominic Perrottet has introduced legislation to Parliament as a first step in the package of reforms that would do away with stamp duty on property transfers while imposing a new broad-based land tax on all properties in NSW.  Now also included in the plan is a legislated cap on yearly increases to land tax to protect first homebuyers from unexpected bill spikes.

The government budgeted in June for first-home buyers to have a choice between paying a once-off stamp duty on homes worth up to $1.5 million or choosing an annual tax instead. If the legislation passes both houses of Parliament before the end of the year, first home buyers who opt-in to the plan that starts next January 16 would pay an annual levy of $400 and a 0.3 per cent tax on the value of their land. Treasury officials estimate 6500 first-home buyers a year would take up the option of paying an annual tax instead of stamp duty.

In an interesting departure from Mr Perrottet’s original plans, the property would not be locked into the tax scheme once it is sold. Any future owners of one of these properties, if not first home buyers, would still have to pay stamp duty. If they too were first home buyers, they could opt for either the land tax or stamp duty. 

But do the government’s proposed land tax arrangements really create savings for first-home buyers? The Guardian’s Michael McGowan did the calculations on a three-bedroom house in Fairfield, western Sydney with a selling price of $975,000. The one-off stamp duty would be $38,907 on the transaction, but the land tax in year one would be just $2,209. 

So yes, there are savings – for a while. It would be 15 years until the total land tax paid would exceed the stamp duty amount.  However, the total land tax bill if the property is sold after 25 years would be a massive $85,337. That’s a bonus of $46,430 for the state government.

The government’s intention is to eventually collect a tax each year from every property in the state, meaning a homeowner in Sydney would pay thousands of dollars in land tax on top of rates and other charges every year. The amount of tax paid would rise with any increases in the rate of tax or in the value attributed to the property by the Valuer-general.

The Labor party has already rejected introduction of any legislation that would do away with stamp duty and bring in a broad-based land tax before the March 2023 election. Its position is that stamp duty reform should be taken to the election, and it’s unlikely that the complex legislation and political negotiations required could be successfully undertaken by the government prior to next year.

“Mr Perrottet does not have a mandate to introduce a forever tax on people’s homes and NSW Labor will not support it,” opposition treasury spokesman Daniel Mookhey said.

The shift from stamp duty to land tax has already begun in the ACT where ten years ago the Labor government began to phase out stamp duty and gradually bring in a broad-based land tax on property owners over a 20 year period. However, property tax bills on landowners, collected by rates on principal places of residence and an additional land tax on investors, have significantly escalated while funds from stamp duty have still continued to grow.

John Kehoe writing in the Australian Financial Review says it’s unlikely stamp duty in the ACT will ever be abolished: “The problem is that stamp duty ‘bracket creep’ has gone through the roof. The modest reductions in stamp duty rates and adjustment in thresholds have failed to keep pace with house prices. Stamp duty payable on the Canberra median house price has increased by almost $16,000 in a decade, when stamp duty was meant to be phased down,” he said.

Sources:

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