The Peak Is Near As Rate Rise Forecast

The values of Sydney properties have continued to rise in 2022, although not at the dizzying rates seen in 2021. The Agency chief executive Matt Lahood described the gains seen last year as a “once in a lifetime” event: “It had to come back at some stage, I think this will be the year of levelling off,” Mr Lahood said.

In fact, Sydney house prices have shot upwards more than 55 per cent in just the last three years, with Domain figures showing the typical house now costs around $570,000 more than it would have in early 2019. This incredible rate of growth is certainly impressive, but also unsustainable as the market’s slowing indicates.

One of the most important factors in the slowing market since October last year has been the four major banks as well as many of the second-tier financial institutions increasing their rates on fixed-interest loans.

Realestate.com.au executive manager economic research Cameron Kusher told News.com.au that market conditions had already led to a slowdown in buyer activity: “Prices are still rising but the rate of growth has slowed, and our forecast is, even without an interest rate hike, we will continue to see price growth slow in 2022,” Mr Kusher said.

“When interest rates go up that will contribute to a slowing of the rate of growth in prices in the Sydney and national housing market,” he said. This will especially impact first-home buyers who are already struggling with high prices, higher deposit requirements and increased monthly mortgage payments. 

Yet, every month, Australians are borrowing over $32 billion to spend on housing, basically double the $16 billion per month we were borrowing in 2018. This is largely because investors are back in the market with a vengeance, borrowing far more money than ever before. 

And, as Knight Frank chief economist Ben Burston told the Herald’s Jennifer Duke, institutional investors and commercial real estate buyers were unlikely to be deterred by rate rises: “It’s bringing forward something investors were expecting to happen [earlier than the RBA was saying] anyway,” he said.

“Well-located property offering a strong level of income returns is still very attractive. Real interest rates are not only very low but still negative and individuals, as well as investor groups, will be aware that just holding money offers [little returns] to the extent that there’s uncertainty around inflation.”

Alex Veljancevski, CEO of mortgage and home loan brokers Eventus Financial, says even if interest rates will still remain at historically low levels: “We’re still talking about low interest rates and lots of areas that offer investors opportunity,” he says.

“And for those investors who’ve already bought, they’re seeing so much growth in the price of their properties that many are using the equity created to invest further.”

Hopeful buyers can expect to have more choice this year as the number of listings increase. In fact, the number of new homes on the market at the end of 2021 was the highest since 2015, and Sydney recorded a 10.5 per cent increase in new listings in the four weeks to January 23.

Auction Action

Vendors aren’t wasting any time placing their properties in front of potential buyers at Australian auctions. CoreLogic figures show that listings were up 30 per cent year-on-year in the last week of January despite the Australia Day holiday period and the traditional slow restart to the property auction activity.

Ray White NSW chief auctioneer Alex Pattaro said auction volumes were noticeably up compared to previous years, with sellers deciding to take advantage of lower stock levels and less competition. There were early indications of strong buyer inquiry, with open for inspections drawing more people than they did in late 2021. 

Domain’s Elizabeth Redman said hopeful buyers at auctions should once again be wary of the ‘wounded underbidder’ we mentioned last February – those who’ve missed out at earlier auctions and have returned to the market with bigger budgets and a serious intention to buy. 

Wakelin Property Advisory director Jarrod McCabe has seen buyers returning to auctions after they’ve taken a break to recharge at the end of a long year: “It’s not uncommon to see people go away and look at other areas, or even [who] have been able to secure extra funds and come back ready to go,” he said.

“They’re not sure around whether or not all of the reports and discussion prior to Christmas about the market softening, whether that will continue in the new year or whether it was a bit of a flash in the pan and the market will recover pretty quickly.”

Buyers are once again looking to the suburbs after emerging from lockdowns, according to a National Australia Bank survey that shows the tree-and sea changers are losing their zeal for a place outside the metropolitan area.

The bank surveyed 370 property professionals including investors, real estate agents and developers.

Andy Kerr, the NAB’s executive of home ownership, said buyer sentiment had dramatically shifted as the pandemic entered a new phase, with dynamics relatively “more normalised”.

“We know that lockdowns have reshaped how we live, with many at home for longer periods; the trade-off between affordability and lifestyle has changed markedly throughout the pandemic, with choices around CBD proximity, additional space and price fluctuating over the last two years,” Mr Kerr said.

“What we are now seeing is little green shoots of people returning to inner-city suburbs, looking for the balance of lifestyle and value as cities like Melbourne and Sydney have opened up. This has been aided by more subdued price growth in these areas.”

A new source of housing for hopeful buyers is developing in the Hills District, where hundreds of new units will go onto the market after years of planning and construction around new Sydney Northwest metro stations.

“There is going to be an unlocking of sub-million [dollar] properties in the Hills District, which is highly sought after and seldom found,” said Stu Benson of Castle Hill-based Benson Auctions.

“It’s going to be a litmus test. We need a couple of weeks of results under our belt until we gauge what the 2022 market is going to look like.”

A Peek At The Peak

It seems like every month since the start of 2021 we’ve been asking whether the market has reached its peak, whether property prices will fall, or whether the rises of 2021 will continue into 2022 – and if they do, how high can they go?

Figures from CoreLogic outline just how fast and how strong the property market has been since the boilers were lit in 2021. It notes that the typical Australian homeowner has become $131,236 richer on paper over the past year.

Domain’s Quarterly House Price Report released January 27 shows that prices in every Sydney suburb recorded annual growth last year, going up by as much as $745,409. The housing boom was so strong that even the bottom 20 suburbs in the city posted growth in the 12 months to December 2021.

Although the biggest part of Sydney’s massive price increase occurred in the first part of 2021, the last quarter of the year wasn’t exactly quiet, Greater Sydney house prices went up by six per cent in the final quarter alone, to a median of $1,601,467. 

CoreLogic’s Research director Tim Lawless is one of those trying to pick the peak, and he sees some key signs that the peak is near: “Yet as the rate of dwelling value appreciation slows, capital city and broad ‘rest of state’ markets are yet to peak, causing plenty of speculation about whether this will occur in 2022 and mark the start of a downturn,” he wrote.

Nerida Conisbee, Ray White’s chief economist, says even if the peak is yet to come in many markets, the period of rapid growth is most likely behind us: “What’s certain is it’s unlikely we will see price growth anywhere near what we saw in 2021. Price growth or declines, however, will be highly variable depending on where you are,” she explained.

“Even with the best information, it’s difficult to time a peak and trough. Having said that, buying at the peak generally leads to price growth over a longer time period – even if prices stabilise or decline immediately following the peak,” she said.

Domain’s chief of research and economics Dr Nicola Powell says the Sydney market has already signalled a slowdown, with the total number of homes for sale rising and prices at the top end of the market pulling back slightly. She notes that the eastern suburbs median was down 0.6 per cent over the last quarter to $3.6 million, while the northern beaches had the second lowest quarterly growth at 2.6 per cent.

Weaker growth across the two regions, which had been standout performers during the pandemic, showed conditions were easing, Dr Powell said.

AMP Capital’s chief economist Shane Oliver said an earlier-than-expected rate increase would bring forward the peak in property prices. 

“I was thinking prices would have peaked nationally probably September, October and then start to decline into next year, whereas if we start getting rate hikes in August or earlier, that peak could come around the middle of the year, in prices, or a little bit earlier,” he said.

“For the last four months or so we could actually be looking at price declines… For next year I was forecasting a decline of 5 to 10 per cent, it just brings forward the timing of that decline.”

Commonwealth Bank senior economist Kristina Clifton said that since November some lenders had been hiking their fixed interest rates and new limits had been applied by the prudential regulator to reduce the size of the average new loan.

“Trends in new lending are a good leading indicator of dwelling prices. While November showed a bounce, new lending is below its recent peak,” she said. “We expect affordability constraints, slow population growth and higher lending rates will see a much softer housing market in 2022 compared to 2021.”

The latest forecast from the National Australia Bank (NAB) is unequivocal about the end of the boom. It says Sydney house prices will end this year “roughly flat” before dropping 11 per cent or more in 2023.

NAB chief economist Alan Oster sees Sydney house prices ending 2022 up about 1.9 per cent higher, then tumbling 11.4 per cent in 2023.

“In terms of forecasts, we have brought forward the timing of the correction we expect in house prices to late 2022 as affordability constraints begin to bite and rising mortgage rates place downward pressure on prices,” he said.

Interesting Forecasts

Westpac, one of our ‘big four’ banks, has made a detailed prediction of when and by how much the Reserve Bank of Australia (RBA) will raise its prime interest rate, starting this year with rises continuing into 2024. Bill Evans, the bank’s chief economist, acknowledges that he’d previously predicted the first hike in February 2023, but “developments since then have now prompted us to bring forward that tightening date to the [RBA’s] meeting on August 2, 2022”.

Westpac expects that meeting will raise the rate by 15 basis points, followed by a further hike of 25 basis points in October. While the RBA forecasts underlying inflation will reach 2.25 per cent by the end of 2022 and 2.5 per cent by the end of 2023, and wages growth will reach 2.5 per cent in 2022 and 3 per cent in 2023, Westpac sees a much faster lift in inflation and wages growth.

Westpac anticipates that underlying inflation will reach 2.6 per cent in March 2022 and 2.9 per cent in June 2022. It also believes that unemployment will fall to 3.8 per cent by the end of this year –the lowest rate of unemployment since 1974 and a callout to the RBA that the nation can afford an increase in interest rates.

Gareth Aird, head of Australian economics at CBA, another of our ‘big four’ banks, also expects the RBA to raise its rates in 2022: "An underlying inflation outcome in line with our forecast would be a big upside surprise compared to the RBA's central scenario for the inflation outlook," he noted. 

He said it was the bank’s expectation that the RBA would end purchases under the bond purchase program, which it did at the February 1 board meeting: “It should also lay the groundwork for a rate hike in late 2022."
 
The ABC’s Michael Janda says there’s both good news and bad news in these rate rise speculations: 
“The good news, if you have a mortgage, is that high debt levels in Australia, the US and most parts of the developed world mean this rate rise cycle is likely to be limited — Westpac expects it to top out here at 1.75 per cent.

“Meanwhile, the bad news? On RateCity's calculations, a household with a $500,000 mortgage will need to find more than a $100 a week in their budget by March 2024 to meet those extra repayments, and that's assuming commercial banks don't raise rates by more than the RBA,” he said.

But many borrowers have bigger mortgages, and by the end of October this year those with a $750,000 mortgage would see their repayments increase by $154, and those with a $1 million mortgage would see an increase of $204 per month. And By March 2024, the repayments on the $500,000 mortgage would be $427 per month higher than today, $641 higher for the $750,000 mortgage, and $854 higher for the $1 million mortgage.

Other nations have already seen rate increases from their central banks. The Bank of England raised its rate in December, and then recorded 5.4 per cent inflation for that month, which it felt justified the move. The Bank of Korea has raised interest rates three times — to 1.25 per cent — while the Reserve Bank of New Zealand has already lifted its official interest rate twice, to 0.75 per cent.

John Kehoe, economics editor at the Financial Review, says that the RBA will soon be forced to acknowledge that rates could rise this year: “Stronger and broader-than-anticipated inflation pressures across the board revealed in the 3.5 per cent headline consumer price index…is further evidence that the world has changed palpably since November.

“The RBA’s earlier forward guidance that interest rates would first rise in late 2023 or early 2024 no longer looks realistic,” he commented. “The RBA won’t be raising rates before the May election, but the second half of this year will be a fascinating time for monetary policy.”

While fixed-interest rates have been going up, banks have cut their variable rate on loans to both owner-occupiers and investors. This has led to an increase in banking customers choosing variable rate mortgages, although the reduction in variable rates may prove short-lived. 

Units More Affordable

Sydney’s record median house price of $1,601,467 is now twice that of units at $802,255, according to Domain data. This price gap between houses and units has more than tripled in the past 30 years and is still accelerating.

A good example can be found in Sydney’s northern beaches where the median unit growth shot up 32.5 per cent during 2021, not far behind the gain of its housing counterpart at 36.9 per cent. But based on median prices in the area, there is still a price gap of $1.56 million.

Domain’s chief of research and economics Nicola Powell says there are a number of market conditions that should push unit prices up in 2022: “They’ve seen less growth than house prices, we’ve seen rising investment activity, we’ve got tight rental markets and the sheer inability for buyers to buy a house,” Dr Powell said.

“The dream of a first home has absolutely moved away from that quarter-acre block, the single detached house, it’s just not achievable when prices are exorbitant,” Dr Powell said.

“We’re likely to see unit prices grow. There is much more value and affordability in a unit.

Eleanor Creagh, Senior Economist at PropTrack agrees, saying although the latest PropTrack report showed houses remained the dominant property type searched for online, interest in units was the highest it’s been in two years at 31.4 per cent of searches.

“The premium of house prices over unit prices has reached record highs, with the pandemic driving one of the biggest shifts we’ve ever seen when it comes to housing preferences. But with credit conditions tightening and a normalisation of migration placing renewed pressure on inner city rental markets, demand for units could rise as buyers look for affordable options,” Ms Creagh said.

Those unit owners wanting to upgrade to a free-standing house or even a more desirable unit are also feeling the pain, as outlined by Romeo Raad, a senior broker with Aussie Home Loans: “A lot of people who bought a unit, their borrowing capacity was a lot stronger than what it is now. 

“A person on the same income could have borrowed $100,000 or $200,000 more than now due to tightening of restrictions,” Mr Raad said, adding that house prices have soared in the meantime.

Edwin Almeida of Ribbon Property Consultants says that the Omicron variant has caused a ‘seismic shift’ in the market, saying: “…it has really created two very different property markets and has completely flipped sentiment from where it was when the auction season ended last year,” Mr Almeida.

“On one hand the owners of freestanding homes are increasingly concerned about letting people into their homes for inspections and are holding off listing their properties. At the same time the effects of the pandemic continue to drive strong demand for houses.

“Apartments are another matter entirely. Listing volumes continue to remain strong and overall, this subset of the market may face a much more difficult time,” he told News.com’s Tarric Brooker.

BresicWhitney’s director Shannan Whitney is also not convinced units will rise significantly in either popularity or price: “Affordability on housing can be a factor but I also think the last cycle has been largely driven by owner-occupiers, and investors play a big role in the unit category,” Mr Whitney told Domain.

Unless the investment landscape was more attractive, a major driver of apartment market growth, units would not increase in price, he stated.

Remember November?

It was an entirely different property market before Omicron when, in November last year, the housing market was heated up by competition between investors and first-home buyers. Figures from the Australian Bureau of Statistics (ABS) show that investor lending hit a new high of $10.1 billion in that month while first-home buyer activity increased 1.9 per cent, reversing a downward trend that began in January 2021.

Katherine Keenan, ABS head of finance and wealth, said that the overall value of new loan commitments for housing increased 7.6 per cent nationally last November, while home buyer loan commitments in NSW rose 9.6 per cent.

“Investor lending has grown for the past 13 months and accounted for around one third of the value of new housing loan commitments in November 2021. The previous investor lending peak in April 2015 accounted for 46 per cent of new housing loan commitments.”

The leadup to November had already pointed to a good ending to the year. CoreLogic’s latest Pain and Gain Report tells us that vendors made paper gains of an incredible $270,000 when they sold their properties during the September quarter of 2021. Of all the homes that sold in this quarter, 92.4 per cent were sold for a paper gain, up from 91.9 per cent in the June quarter.

CoreLogic’s head of research Eliza Owen said the report covered about 99,000 sales in the quarter. “The increase in the rate of profit-making sales is a reflection of strong capital growth across Australian dwelling markets despite COVID-induced disruptions to transaction activity. 

“The three months to September was the fifth consecutive quarter in which the rate of profit-making sales across Australia increased.”

Sources:

‘It’s crazy’: Sydney house prices surge 55 per cent in less than three years,’ Kate Burke, Domain, 12 February 2022
‘Sharpened buyer intent shows signs of significant housing market shift,’ Kirsten Craze, News.com.au, 9 February 2022
‘The ‘biggest challenge’ facing property investors this year,’ Sue Williams, The Sydney Morning Herald, 8 February 2022
‘The ‘biggest challenge’ facing property investors this year,’ Sue Williams, The Sydney Morning Herald, 8 February 2022
‘Second step on Sydney’s property ladder, from unit to house, is now a giant leap,’ Tawar Razaghi, Domain, 6 February 2022
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‘Omicron effect’ sees Aussie house prices face seismic shift,’ Tarric Brooker, News.com.au, 23 January 2022
‘Westpac predicts six interest rate rises by March 2024,’ Frank Chung, News.com.au, 22 January 2022
‘Profit making resales continue to rise despite widespread lockdowns impacting transaction volumes,’ Eliza Owen, CoreLogic, 19 January 2022
‘How do you make a $270,000 profit? Sell your property during lockdown,’ Elizabeth Redman, Sydney Morning Herald, 18 January 2022
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Rate rise in 2022: buyers warned to prepare for higher borrowing costs,’ Kate McIntyre, News.com.au, 14 January 2022