Market comment: BACK TO THE FUTURE

Thu, 19 May 2022

Market comment: BACK TO THE FUTUREBack to reality and rising interest rates

What has been called ‘Sydney’s pandemic property boom’ is starting to fade as prices reach levels many buyers deem unaffordable and interest rate rises increase the costs of borrowing. 

The median value of a property in Sydney in April was down 0.5 per cent from January to $1,127,723 and the number of properties on offer was up to somewhere around the five-year average. However, the combined median price of both freestanding houses and apartments is still far higher – up about 14.7 per cent, than it was a year ago.

The slippage in prices varies from one part of Sydney to another. According to CoreLogic, dwelling values fell in around two in five Sydney suburbs during the first three months of 2022. Of the 917 Sydney suburbs analysed, 354 experienced a fall in median dwelling values. House prices in 189 Sydney suburbs declined, while 165 unit markets weakened during the same period.

Eliza Owen, CoreLogic’s head of research, said the largest price decreases were found in some of Sydney’s more expensive suburbs: “Inner Sydney suburbs Beaconsfield, Newtown and Camperdown notched up some of the sharpest house price falls of 7.2 per cent, 5.8 per cent and 5.7 per cent respectively,” she said.

“It is likely that slightly tighter lending conditions and higher average fixed rates are hitting the very top of housing markets first. These same areas are seeing some of the bigger jumps in advertised stock levels too, so as we see new demand for housing in these areas decline, buyers have more choice, more time for decision-making, and more power at the negotiating table.”

However, at the luxury end of the Sydney market, values of prestige properties are skyrocketing. Vaucluse, with a 42.8 per cent jump in price just in the 12 months to March, doubled the 21 per cent price growth of broader Sydney. Dover Heights was up 40.3 per cent, Rose Bay was up 40.1 per cent, and Woollahra climbed 39.8 per cent. 

It’s definitely a different world at the pointy end where there aren’t that many palaces on offer. Atlas Property Group’s Michael Coombs says there are lots of unsatisfied buyers at the highest levels: “There are plenty of buyers in that $20 million to $30 million level, but no one is selling,” Coombs said. “Who knows what next year will bring?”

The Reserve Bank of Australia has increased the official interest rate for the first time in more than a decade. This is discussed in greater detail elsewhere in this article, but it’s going to have an impact on property prices once the rise has been passed on to borrowers, both those who are present mortgage holders and those seeking a loan.

Even before the rate increase, the Sydney auction clearance rate had slumped to 62.9 per cent in April, down 12.5 percentage points from the same month last year. And despite having had the highest number of auction listings in April since Domain began keeping records, in the first weekend of May there were just 559 homes up for auction which was down 41.9 per cent year-on-year.

CoreLogic research director Tim Lawless said a lift in interest rates would likely lead to a weaker overall property market: “Interest rate increases generally have a downward impact on house prices and they are likely to also put downward pressure on consumer sentiment which feeds into the market. They are also likely to affect peoples’ ability to borrow, making it more challenging to get into the market.”

CommSec chief economist Craig James said the bank expected house prices to flatten this year, followed by a fall of 8 per cent next year. He cautioned that prices could fall further than this if the RBA took a more aggressive approach to raising rates.

“Growth of home prices has been slowing for a number of months. Arguably, speculation of higher interest rates has been a key factor driving the slowdown, together with concerns about weakening housing affordability,” he said.

But we’re not heading for a crash as Eastern Suburbs agent Broderick Wright told The Guardian’s Brigid Delaney: “Whenever we see a slight change in the market [such as a rate rise] we find properties that have challenges are the first to feel the pinch”.

“Yes, some mortgage holders will be affected if they are already stretched to the limit, but if anything we’ll see a slight softening. We won’t see it fall off a cliff.”

Up go interest rates

At its monthly meeting on May 3 the board of the Reserve Bank of Australia (RBA) decided to lift the official cash rate from 0.1 per cent to 0.35 per cent. This is the first increase to the cash rate since November 2010, as well as being the first RBA alteration to its rate during an election campaign since 2007. 

It’s also expected to be the first rate rise in a series, with more to come in the near future. In the bank’s official statement following the meeting, Governor Philip Lowe said the rise was the beginning of a process: “The board judged that now was the right time to begin withdrawing some of the extraordinary monetary support that was put in place to help the Australian economy during the pandemic.

“The economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up. Given this, and the very low level of interest rates, it is appropriate to start the process of normalising monetary conditions.” 

The bank’s decision came after the headline rate of inflation in the year to the end of the March quarter was unexpectedly high at 5.1 per cent, well above the bank’s target range of 2 to 3 per cent. The RBA said it expects further rises of the inflation rate in the near term to around 4.75 per cent but expected it will moderate to around 3 per cent by mid-2024.

Diaswati Mardiasmo, PRD Real Estate’s chief economist, said although banks and other lenders have no direct obligation to adjust their loan interest rates in line with the RBA’s hike, it’s predicted they’ll follow the RBA’s trend upwards: “History tells us they move very, very quickly,” she says. “I would say changes can happen within the next 30 days or so.”

Dr Mardiasmo said that buyers are likely to find their borrowing power reduced, depending on their circumstances and the lender, and the reduction may not be much to begin with: “It could be that instead of being able to borrow $400,000, for example, they are only approved for $380,000 or $370,000.”

Over the last week of March, the ANZ-Roy Morgan weekly measure of consumer sentiment fell 6 per cent to its lowest level since 2010. David Plank, ANZ’s head of Australian economics, attributed the fall in confidence to the high rate of inflation which increased the prospect of further interest rate hikes.

“This is supported by the fact confidence dropped by 9.6 per cent among people paying off their home loan, while for people who already own their home or are renting confidence dropped by 4.7 per cent and 4.2 per cent respectively,” he said.

About one-third of Australian households have mortgages. The other two thirds are about evenly split between rent-paying tenants and homeowners who have paid off their mortgages.

Financial markets anticipate the next rate rise to come as early as June of at least another 0.25 per cent, with further increases to follow.  Westpac has forecast a ‘terminal’ cash rate of 2 per cent in 2023, while ANZ has gone even higher with a forecast of more than 3 per cent. 

Rents soaring

A shortage of available rental properties has caused residential rents to rise by 11.8 per cent in capital cities over the past twelve months, figures from SQM Research show. Asking rents went up by 2.2 per cent just in the month to April 12; rents in Sydney’s CBD rose 5.5 per cent in just the past thirty days.

Capital city house asking rents went up by 14.7 per cent while unit rents rose 11.2 per cent, in a massive reversal of the fall in rents when Covid-19 restrictions stopped migration into Australia while many city dwellers could work from home and chose to move away to less expensive housing in regional areas.

"The reality on the ground will be that many families, many young people will not be able to find the home that they actually require," Louis Christopher, managing director of SQM Research, told ABC News. "We have a real issue on our hands - the biggest issue I've seen in the housing market since I commenced my career back in 2000."

Tenants paying rent in Sydney are paying $50 a week more for a house and $30 more for a unit than they were a year ago, according to Domain’s latest Rent Report. The median weekly house rental cost in Sydney is a record $600, while unit rentals are up to a median $500.

Domain’s chief of research and economics, Dr Nicola Powell, said the recovery of rental prices in Sydney had come once domestic and international borders had reopened: “We may also be seeing the homecoming of city escapees from lifestyle and coastal locations, further driving demand,” she said.

The vacancy rate across Australia dropped to just one per cent in March as rental stock has been reduced by owners selling investment properties and by properties returning to the short-term holiday market now that tourism is back in business. This has contributed to house rents hitting record highs in Sydney’s northern beaches, the outer west, the Blue Mountains, Baulkham Hills and Hawkesbury regions.

However, Dr Powell thinks there could be a limit to these recent peaks in rental costs: “We talk about that ceiling price in the sales market … and I think a similar thing may be happening in the rental market. Budgets can only stretch so far; people will compromise on property type and then compromise on location.”

Independent economist Saul Eslake disagrees, saying those hoping the slowing of property prices will filter down into rental rates will be disappointed: “There is not much connection in my view between property prices and rents. If you look back at late 2017 to mid-2019, prices went down in Sydney and Melbourne but that had no impact because there were no falls in rents during that period.”

His view is that rents will rise when demand is high and supply is low. These are the conditions in today’s market and rents across Sydney are showing few signs of slowing. Economic program policy director at the Grattan Institute Brendan Coates said this is the perfect recipe for continuing rent rises.

“Rents are rising pretty sharply and [affordability] is absolutely a problem,” Coates said. “We saw some respite in rents in Melbourne and Sydney during COVID but now migrants are starting to return and the population growth is starting to turn around.”

RMIT senior lecturer Leonora Risse points out that higher interest rates will also make borrowing harder for more first home buyers, which will increase demand for rental properties and push up rents: "For prospective home buyers trying to get into the housing market, a rate hike could make it tougher for them and they'll have to keep renting for longer," she said on ABC’s The Drum.

"This means they will continue to add to demand for rental properties, keeping rental rates high."

Foreign investment tumbles

Foreign investment in Australian residential real estate has fallen to its lowest level in more than 15 years, as shown by the relatively small number of just 4384 approvals in the twelve months to June 2021. The total value of these transactions was $10.4 billion - a drop of $6.7 billion on the previous twelve month period.

The number of foreigners buying established dwellings also fell sharply, down to just 661 from the total of 1101 in the previous year.

The last time Australia’s residential market fell to such a low number of approvals was in the 2005-06 financial year when the Foreign Investment Review Board (FIRB) annual report showed just 4648 approvals totalling $11.6 billion. For comparison, the highest dollar volume of foreign investment in residential real estate came in 2016-17 when $30 billion worth of property purchases was approved.

Dr Shane Oliver, AMP’s chief economist, attributed the decline in foreign investment to the travel restrictions imposed as a result of Covid-19: “Closed borders would have disproportionately impacted residential investment because those buyers like to come and look,” Dr Oliver said. “And with foreign students shut out of the country, that was another reason potential buyers couldn’t come here.”

However, the drop in residential investment was offset by an increase of more than 100 per cent in investments in Australian commercial property by overseas buyers, up from $38.8 billion in 2019-20 to $82 billion in 2020-21. 

“Commercial property investors often have local branches operating here, so that market wouldn’t have been as disrupted as the residential market,” Dr Oliver explained.

Investors from the United States dominated the combined commercial and residential sectors with more than $20.8 billion worth of investments. Investment from Singapore was second with $13.8 billion, followed by Germany with $7.5 billion, Canada with $7.3 billion and China finishing in fifth place with investments worth $6.3 billion.

Houses over units

Figures from the March quarter show that Sydney’s property buyers have a preference for houses over units. The price growth gap between houses and units in some parts of Sydney is more than 15 percentage points over the past year, and the difference tends to be the widest between houses and high-rise apartments.

Eleanor Creagh, senior economist at, says the impact of the pandemic on housing preferences has played a key part in creating this gap: “Lifestyle has become a greater priority, with proximity to the CBD less so. The experience of lockdowns also made apartment living relatively less attractive, with many desiring more space and larger homes.

“For many, the pivot toward remote work and more time spent at home has made larger dwellings a more attractive proposition. As a result, the premium people have paid for houses greatly accelerated in 2021.”

Sydney unit prices fell 1.2 per cent to a median of $796,524 in the March quarter, the latest Domain House Price Report shows, while house prices rose a marginal 0.2 per cent to a median of almost $1,591,000.

Overall, house prices were up 21 per cent for the year, although the rate of growth hit a 12-month low. There were also quarterly house price declines in six regions, including in the eastern suburbs and Sutherland Shire, where the median fell more than 5 per cent.

Sydney’s unit prices either fell or just held steady over the quarter in most regions. Prices were down annually in half a dozen areas, although the unit median was still up 4.8 per cent year on year.

More than one in 10 homes sold in Sydney are now changing hands at a loss in some neighbourhoods despite the recent pandemic property boom. The losses have been concentrated in apartment-heavy areas where new supply in recent years has been met with falling demand while international borders were closed.

Independent analyst Angie Zigomanis says the property boom was mostly about detached houses: “Markets that have been most exposed to overseas migration, and the drop in overseas migration, have struggled the most in tenant occupancy, rental growth and therefore pricing.”

Although the drop in rents affected how much unit buyers would pay, as rents start to pick up values we are likely to see some recovery, Zigomanis told the Herald’s Elizabeth Redman, adding that apartments designed for owner-occupiers are likely to perform better than those intended for investors.

While Sydney’s unit median had fallen first, houses were expected to eventually follow, with Domain noting the momentum of the housing market, which had far greater growth throughout the pandemic, would take longer to slow.

Eliza Owen, head of research at CoreLogic, agrees with other analysts that one of the reasons for the relative recent poor price performance of unit markets is COVID-19 related travel restrictions, including the closure of Australia’s international borders. 

She says demand for investment units in urbanised centres fell because of their high exposure to migrants and international students. But now the re-opening of international borders is seeing arrivals from overseas rising quickly, which should help to support the prices of units in Sydney.

Nicola Powell, Domain’s chief of research and economics, says while there are currently a number of market metrics showing a slowdown in Sydney’s housing market, some areas have recently seen an increase in average open home check-ins. Dr Powell also said the biggest weekly lift in new listings was for units, rather than houses: “This is good for affordability and will help to service the rising investor demand,” she said.


‘Why falling property prices are actually bad news for first home buyers,’ John Collett, Sydney Morning Herald, 11 May 2022
‘Has the interest rate rise broken Australia’s housing market fever?,’ Brigid Delaney, The Guardian, 10 May 2022
‘Downturn? What downturn? Rich get richer from soaring trophy home values,’ Lucy Macken, Domain, 10 May 2022
‘Where to for units now that cities are springing back to life, explained in thirteen charts,’ Eleanor Creagh,, 6 May 2022
‘Sydney buyers sniff opportunity with interest rate rise,’ Tawar Razaghi, Domain, 7 May 2022
‘Where to for units now that cities are springing back to life, explained in thirteen charts,’ Eleanor Creagh,, 6 May 2022
‘Where homes sold for a loss despite the property boom,’ Elizabeth Redman, Sydney Morning Herald, 6 May 2022
‘How will renters like Cameron be impacted by interest rates rising?,’ The Drum, David Taylor and Karen Tong, 6 May 2022
‘Higher rates to hit house prices and home buyers, Moody’s warns,’ Shane Wright and Rachel Clun, 5 May 2022
‘Apartment price falls signal end to Sydney’s pandemic property boom,’ Kate Burke and Elizabeth Redman, Domain, 28 April 2022
‘Houses still in high demand, apartment prices lag,’ John Collett, Sydney Morning Herald, 24 April 2022
‘The RBA has lifted the cash rate to 0.35 per cent. Here’s what it means for home buyers and owners,’ Chloe Breitkreuz, Domain, 5 May 2022
‘Hunger Games situation’: Rental vacancies at record lows as tenants do it tough,’ Melissa Heagney, Sydney Morning Herald, 5 May 2022
‘Boxed in: Sydneysiders hit with fastest-growing house rents in 13 years,’ Kate Burke and Melissa Heagney, Domain, 5 May 2022
‘Rents 'explode' across the country, as house prices fall in many Melbourne, Sydney suburbs,’ Rhiana Whitson, ABC News online, 5 May 2022
‘Sydney House Prices Slide Further in April as Rate Rise Looms,’ Sati Pandey, Bloomberg, 2 May 2022
‘Property prices fall in Sydney and Hobart as national boom slows,’ Ewan Black, AAP, 2 May 2022
‘The interest rate rise we had to have and how it will help,’ Jessica Irvine, Sydney Morning Herald, 3 May 2022
‘Reserve Bank opts for standard 25-basis-point interest rate hike as first in likely string of rises,’ Michael Janda and Emilia Terzon, ABC News online, 3 May 2022
‘RBA lifts rates just weeks out from election, flags more to come,’ Shane Wright and Rachel Clun, Sydney Morning Herald, 3 May 2022
‘Foreign investment in Australian homes falls to 15-year low,’ Lucy Macken, Sydney Morning Herald, 8 April 2022
‘The interest rate rise we had to have and how it will help,’ Jessica Irvine, Sydney Morning Herald, 3 May 2022