Market comment: HURRY UP AND SLOW DOWN

Tue, 22 Mar 2022

Market comment: HURRY UP AND SLOW DOWNThe boom loses some momentum, but with gains still in sight

The house price boom of 2021 has been unlike almost anything the Sydney market has ever seen. We say ‘almost’ because there have been two other periods when house prices in Australia have risen more than they did last year and both were caused by factors that were one-offs and not likely to ever be repeated. 

Economist Nigel Stapledon concluded that our first – and biggest, house price boom came in 1950 when wartime price controls were removed and prices shot up by 111 per cent in that year. The second biggest boom was between June 1985 and June 1989 when median house prices in Sydney grew by 127 per cent after a number of regulations in the finance industry were removed and it became much easier for people to access loans.

Both these previous booms proved unsustainable and price growth eventually dropped back to a more normal rate. In fact, the boom of the 1980s was followed by a recession, the one PM Paul Keating said was “the recession we had to have”. 

Sydney was the undoubted winner of the property boom of 2021 with the average Sydney home hitting a record price of $1.6 million, up from a median of $1.2 million in 2020. Greater Sydney house prices rose by 33.1 per cent, equivalent to almost $400,000 of the median home’s value.

(Let’s not forget that this was entirely the opposite of forecasts from most economists who, considering the possible effects of the pandemic on Australia’s economy, in March 2020 were predicting a deep recession and housing price falls of up to twenty per cent.)

By the last quarter of 2021, 26 per cent of Sydney suburbs had a typical house price of more than $2 million, concentrated mostly on the north shore, northern beaches, the city, eastern suburbs and inner west. 

And there are now many suburbs with median prices greater than $3 million, including Birchgrove in the inner west, North Balgowlah and Avalon Beach on the northern beaches and Camerray and Chatswood on the north shore. But it doesn’t even stop there. Clovelly, North Bondi and Woollahra are now members of the $4 million median price club.

Sydney has even created Australia’s first ‘Billion dollar suburbs’ in which the value of property sold during 2021 was more than a billion dollars. Mosman in the lower north shore topped the charts with $1.82 billion in property sales, with Castle Hill in second place, scoring $1.06 billion worth of sales for the year. 

Signs of slowing

But there are signs that the momentum of the Sydney market is slowing. Sydney home values slipped by a miniscule 0.1 per cent in February, but that was the first monthly fall in 17 months so it did garner a bit of media attention.

CBA’s head of Australian economics, Gareth Aird, thinks it indicates the market has neared its peak: “The context of what’s happened last year with this phenomenon of surging prices meant prices had to top out,” he said. “With talk about rates rising, and the Reserve Bank raising interest rates, that’s going to affect what people are willing to pay for a home.”

It’s unfortunate that Australia’s property price boom has pushed around 70 per cent of homes out of reach of first home buyers on middle incomes. It’s estimated that almost two-thirds of first home buyers in Sydney can afford only one of any ten homes on offer.

Saving enough for a deposit is challenging. A report by the National Housing Finance and Investment Corp (NHFIC) on the state of the nation’s housing sector said the surge in prices meant the average Australian first home buyer needs to save for an extra year to accumulate a 20 per cent deposit of about $130,000. 

Across Australia, first-time buyers now need nine years to save a deposit, compared to about four years in the early 1990s. With a median price of $1.6 million, first-home buyers in Sydney need a daunting 16.6 years to save a 20 per cent deposit, then need to spend 60.4 per cent of their household income to repay their mortgage.
The Westpac-Melbourne Institute Index of Consumer Sentiment asks whether it’s a good time to buy a dwelling, offering an insight into owner-occupiers’ thoughts on affordability. Westpac senior economist Matthew Hassan says it shows many people now doubt this is a good time to buy property.

“It turned down pretty sharply over the last year, albeit from quite a high starting point,” Mr Hassan said. “It’s pointing to a downturn over the next six months or so,” adding that investor demand is showing more strength than owner-occupiers and the demand for investor loans is up more sharply than for owner-occupier loans.

“Over the longer run the more usual cycle for dwelling prices is to have a steep rise followed by a long period of flat, perhaps slightly declining prices,” Mr Hassan said. “It’s more usual to reach a new plateau and have a period of relative stability. It’s not a pendulum that we swing automatically into a correction phase.”

Lately, Sydney has seen a rush of homeowners putting their properties on the market with new listings up around seven per cent on this time last year. This is good news for intending home buyers, and Domain’s figures show buyer demand up nine per cent with auction clearance rates in the high 60s or 70s most weeks. 

Ryan Felsman, senior CommSec economist, says that conditions are turning in buyers’ favour as the market returns to more normal levels: “More available homes for sale means there is less urgency for buyers, giving them more power at the negotiating table for the [first] time in at least 18 months,” Mr Felsman said.

“Home prices are slowing after soaring during the pandemic, with the run-up in prices crimping affordability. Also, rising fixed mortgage rates and expectations that variable mortgages will lift have also weighed on prices.”

Sydney prices, however, can still make headlines. A one-bedroom apartment in Birchgrove that was listed for $800,000 sold for $1.532 million in late February. It last sold for $600,000 in 2014. On the same weekend an inner-west home in Strathfield sold for $1.25 million above its reserve price when 17 registered bidders drove the price upwards from $2.3 million to an eye-watering $3.55 million.

Leading greenfield housing market analyst Colin Keane told the Australian Financial Review that moderation of demand will be the “saving grace” for Sydney’s housing sector after land sales surged 33 per cent last year thanks to HomeBuilder and other stimulus measures.

He notes that in Sydney, where future supply is a big issue after the number of active housing estates halved to 75 in 2021 and average project sizes fell to just 75 lots, median lot prices climbed 14 per cent to $544,000 last year. This was despite 9200 lots sold over the year, 17 per cent higher than the seven-year average.

“Sydney has a huge volume of unmet demand [for land]. There’s eight months of demand still on the table,” Mr Keane said.

Now that we’re reopening our borders and overseas buyers will once more have access to Sydney’s property market, what suburbs are the most searched online by foreign buyers? The answer to this question can be found in research done by Domain, and it’s worth noting that blue-chip suburbs near schools, the city or surf were the most sought-after locations.

The city of Sydney topped the list of overseas searches, while popular suburbs included Mosman, Middle Harbour and Chatswood, based on Domain listing data from January 2021 to February 2022. A number of eastern suburbs also made the top 10 most sought-after locations by foreign buyers, including Bellevue Hill, Paddington and Darlinghurst.

Banks forecast market outcomes

The Big Four banks continue to predict rising housing prices in Australia through 2022 with a decrease to come in 2023. The details of their forecasts vary but taken together they indicate a price rise of something from two to eight per cent this year, followed by a fall of around six to ten per cent next year. Westpac foresees the lowest increase in 2022 of just two per cent, with a fall in 2023 of seven per cent.

The banks’ predictions for Sydney aren’t quite as uniform, nor as positive when it comes to rises and falls. ANZ sees a rise of five per cent this year, followed by a fall of 11.4 per cent next year. NAB expects a 1.2 per cent rise in 2022 and a six per cent fall in 2023. 

Felicity Emmett, senior economist at ANZ, says we shouldn’t be too concerned about her bank’s expectations of a national fall in property prices if it happens in 2023: “From late 2020 to the end of 2022, people will have seen an average gain in house prices around 30 per cent. So when you think about our forecast of a six per cent decline in 2023, it’s really just a modest correction in that context. I think people will still feel very wealthy, given the earlier rise in prices.”

Another ANZ economist, Richard Yetsenga told the Sydney Morning Herald that property values look “poised for a soft landing, even as the RBA starts hiking rates”. 

He said the ANZ bank expects the RBA to increase rates in the third quarter of 2022 but there are ‘buffers’ in place to cushion the impacts of the increases: “High household savings buffers, low unemployment and the return of immigration will all help, as will stronger wages growth,” he said.

Another expert in the Sydney market who agrees with this conclusion is Louis Christopher, founder of SQM Research, who also says property prices in Sydney appear heading for a “soft landing.” 

He does not see a crash in prices and expects prices in our two biggest cities to be fairly flat for the remainder of the year: “This would have to be one of the softest landings I’ve seen in the housing market”, Mr Christopher says.

Units answer demand

During the phenomenal growth in property prices over the past 18 months, units have finished a distant second to houses. However, this disparity is likely to change before midyear after our international borders reopen and overseas buyers can once again visit Australia for the purpose of acquiring properties.  

More units than houses were sold at property auctions in almost all major cities in February, and clearance rates were higher for units than houses at recent Sydney auctions. Units are picking up in popularity due to runaway house price growth and the return of investors as the rental market tightens and rents rise in several parts of the greater Sydney area.

Homebuyers too have started to look at apartments, having accepted that they can’t afford a house when high prices and rising interest rates are such important considerations. 

AMP Capital chief economist Shane Oliver said property prices could peak by mid-year, but the recent rapid price gains had already made it harder for lower income earners to buy, with the problem compounded by city dwellers moving to more affordable regional and outer markets where incomes were lower.

Dr Oliver added that record high house prices could force more people into the apartment market in months to come, which could then lead to unit price growth rising above median incomes in more suburbs.

In Sydney, where the gap between auction house prices and auction unit prices was $870,850, buyers have been driven towards the most affordable option.

“The housing market has risen so unbelievably the apartment market hasn’t caught up,” Damien Cooley, director and auctioneer of Cooley Auctions, said. “That’s why we’ll see apartments do better because, from an affordability point of view, people are looking for value and what they can afford.”

It was interesting to note that when property prices in the CBD and inner south dropped by an average of 1 per cent in February and 2.3 per cent over the past three months, houses in the region copped most of the decline falling by 2.4 per cent in February and by 3.8 per cent over the quarter.

The median unit price had a more modest monthly decline of 0.2 per cent and a quarterly drop of 1.5 per cent following 10 per cent growth over the year.

Domain’s chief of research and economics Nicola Powell said we are seeing a turning point in the Sydney property market: “Not only have we got higher levels of homes, so much more choice for buyers and better buying conditions, we are also seeing softening of clearance rates, particularly we’ve got a turning point in units outperforming houses.”

Cameron Porter, principal buyer’s agent at Porters House in Sydney, says that apartments are now a buyer’s market: “It’s always been a buyer’s market on sub-par properties or where there is a high supply of properties such as apartments. That’s when buyers have more power.”

RBA and interest rates

At its March meeting the board of the Reserve Bank of Australia (RBA) maintained the cash rate target at ten basis points and the interest rate on Exchange Settlement balances at zero per cent. In other words, for this month at least the Bank is content to leave monetary conditions as they are, noting that inflation had picked up more quickly than the RBA had expected but was still lower than in many other countries. 

In the words of RBA governor Philip Lowe: “Financial conditions in Australia continue to be highly accommodative. Interest rates remain at a very low level, although some fixed rates have risen recently. The Australian dollar exchange rate is around its lows of the past year or so. Housing prices have risen strongly, although the rate of increase has eased in some cities. With interest rates at historically low levels, it is important that lending standards are maintained and that borrowers have adequate buffers.”

Regardless of this apparent satisfaction with how things are, others watching the housing market foresee that a rise in interest rates is imminent. Gareth Aird, the Commonwealth Bank’s head of Australian economics, said he expects the cash rate to be at 1 per cent by the end of the year, then rise to 1.25 per cent early next year. This would mean an average variable mortgage rate of around 4.5 per cent.

AMP chief economist Shane Oliver thinks the RBA will raise the cash rate in August, but also says this could occur as early as June given stronger inflation data, sound employment outcomes and early signs of growth in wages. He also sees the interest rate peaking between 1.5 per cent and 2.0 per cent within the next two years.

“This would add a similar amount to variable mortgage rates,” Dr Oliver said. “It will take household debt interest payments relative to income back to around 2018 levels.”

NAB chief executive Ross McEwan told the ABC’s Close of Business program that his impression was that the Reserve Bank is in no rush to put interest rates up: "Our view is [it will] probably [be] the latter half of this year that the Reserve Bank will start moving," he said. "I think it's probably going to be about 50 basis points up."

Mr McEwan said there was an inbuilt cap on interest rate rises: "You actually run up against customers who can't afford to pay the mortgages on these, so it starts to put a ceiling in place. We see this year probably a rise in house prices of about 5 or 6 per cent, and let's wait to see what happens in 2023."

CommSec chief economist Craig James expects the first rise from the RBA in more than a decade will occur in June: “Further increases are expected over the second half of 2022,” Mr James said. “While higher interest rates reduce pressure on interest margins for banks, Bendigo Bank noted fierce competition across most lending categories and the continued strong consumer preferences for fixed rate loans.”

The ABC’s Tom Lowrey says that the winner of the next federal election, expected to take place in May, will inherit the political dangers associated with interest rate increases because life will become more expensive for millions of their constituents.

“At the start of 2020, interest rates were already very low. The Reserve Bank had the cash rate target at 0.75 per cent. By late March 2020, as the pandemic was unfolding within Australia and across the globe, it had been slashed to 0.25 per cent, and by late 2020 it was at 0.1 per cent.

“A lot of people saved a lot of money, as their mortgage repayments shrunk. But historic lows can't last.”

Mr Lowrey says that financial markets are expecting up to five small interest rate hikes that will start in June and rise to 1.25 per cent by the end of the year. This will, he calculates, add $300 per month to the costs of servicing a $500K mortgage and nobody will appreciate the government under which such an increase occurs.

“Rising rates can also be a sign of a healthy economy. As Stephen Kennedy said, the economic recovery is an opportunity to ‘normalise’ interest rates. But it might be a hard message to sell to Australians digging deeper in their pocket for their mortgage repayments every fortnight,” he said.

Affordability gap grows

Figures from Domain show that house price growth in four out of five Sydney suburbs outperformed household incomes in 2021. The growth of unit prices in about 25 per cent of suburbs also exceeded household incomes. Domain’s chief of research and economics said this naturally made it very difficult for first-home buyers to maintain a foothold in the overheated market.

“This makes it tremendously hard for people to gain access to the market, for houses in particular, and shows what it can do to your financial position once you’re in,” Dr Powell said, adding that increased demand for homes and holiday properties in lifestyle locations from out-of-area buyers on higher wages, off the back of the rise of remote working and closed international borders, had contributed to the large gaps in some markets.

ANZ senior economist Felicity Emmett told Domain that the sharp acceleration in property prices, propelled by record low interest rates at a time of relatively low wages growth, made it very difficult for aspiring homeowners to save a deposit and contributed to society’s growing intergenerational wealth inequality.

“[The] two-thirds of Australian households who own their own home, they are getting the benefit of those much higher asset prices and a significant increase in wealth, whereas the third of households that don’t own their own home have been excluded from that increase,” Ms Emmett said.

Negative gearing out of favour?

Vacancy rates across Sydney have fallen to their lowest level since November 2017, according to Domain’s Tawar Razaghi: “Freshly opened international borders have heaped further pressure on an already strained rental market, where the vacancy rate fell to 1.7 per cent in February (down from 1.9 per cent in January), according to Domain’s latest Rental Vacancy Rate Report.

“Within Sydney, the tightest rental markets were dominated by far-flung areas due to a combination of factors, including city renters looking for more space and the shortage of rental properties as investors cash in on the property boom, according to experts.”

Changing economic conditions might make investors reconsider negatively gearing their rental properties, even if the federal government makes no changes to current taxation arrangements. 

[Negative gearing is defined by the Australian Tax Office as making an investment that produces a loss, where the income or profit is less than the expenses after the interest on the loan to buy is included in the calculations.]

Negative gearing is popular because when a property is put out for rental, any losses are tax deductible and can also be offset against other income. It works well when the value of the property increases over time. However, a slowing rate of capital gains together with higher interest rates could lead to owners’ income decreasing and even facing losses if prices fall. 

Robert Kiyosaki, who owns an amazing 8,000 properties worldwide, says he’s never negatively geared a purchase: “It just doesn’t make any sense to do so. Negative gearing only works as long as the price of property continues to go up and when it slumps, like we saw in the crash of 2008, it’s a terrible strategy.”


‘Are Sydney’s work-from-home lifestyle suburbs losing their lustre?,’ Tawar Razaghi, Domain, 12 March 2022
‘Housing lot sales to plummet 43pc in 2022, but prices will rise,’ Larry Schlesinger, Australian Financial Review, 10 March 2022
‘More than a quarter of Sydney suburbs have a median house price of $2m,’ Kate Burke, Domain, 7 March 2022
‘The latest sign the housing boom is losing steam,’ Tawar Razaghi, Domain, 8 March 2022
‘How will Australia's property markets be impacted by the return of overseas arrivals?,’ Gareth Hutchens, ABC News online, 25 February 2022
‘The Sydney suburbs foreign buyers searched most during the pandemic,’ Tawar Razaghi and Melissa Heagney, Domain, 4 March 2022
‘CoreLogic report finds first sign of housing market taking a dive,’ Alex Turner-Cohen,, 1 March 2022
‘The Sydney suburbs where property prices are falling the most,’ Kate McIntyre, The Daily Telegraph, 4 March 2022
‘Relief for home buyers: Price boom may be over,’ John Collett, Sydney Morning Herald, 26 February 2022
‘Chronic failure’: Sydney’s rental market approaching crisis level,’ Tawar Razaghi, Domain, 4 March 2022
‘There will be another shock’: RBA warns about big mortgages as rates rise,’ Shane Wright and Jennifer Duke, Sydney Morning Herald, 21 February 2022
‘Growing number of sales prior to auction a sign Sydney market is slowing,’ Melissa Heagney, Domain, 24 February 2022
‘What are the signs that a property market has peaked?,’ Elizabeth Redman, Domain, 3 March 2022
‘Interest rate rise time bomb waiting for whoever wins next federal election,’ Tom Lowrey, ABC News online, 22 February 2022
‘Outrage after one-bedroom Sydney apartment sells $700k higher than expected,’ Alex Turner-Cohen,, 19 February 2022
‘Australian house prices predicted to decrease dramatically,’ Sarah Sharples,, 23 February 2022
‘Median home prices in Sydney could drop below $1m by the end of next year, new modelling suggests,’ Tory Shepherd, The Guardian, 4 March 2022
‘Does your house make more money than you?,’ Kate Burke, Domain, 19 February 2022
‘Sydney home buyers face a record 16 years to save a deposit,’ Nila Sweeney, Australian Financial Review, 21 November 2021.
‘Interest rates are already rising but borrowers can cope, says NAB boss Ross McEwan,’ Rachel Pupazzoni and Michael Janda, ABC News online, 19 February 2022
Statement by Philip Lowe, Governor: Monetary Policy Decision, Number 2022-05, 1 March 2022
‘Interest rate rises expected in June with mortgage repayments to rise,’ Shane Wright and Jennifer Duke, Domain, 15 February 2022
‘What we can learn from previous house price booms in Australia,’ Charis Chang,, 18 February 2022
‘Investor with 8000 homes calls for negative gearing to be axed,’ Sue Williams, Domain, 16 February 2022
‘Unit price growth tipped to outperform houses when Australian international border reopens,’ Kate McIntyre, The Daily Telegraph, 13 February 2022


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