Prices ease, buyers back in the driver’s seat, and forecasts for the future

This time a year ago, property prices were rising fast and first-home buyers were in hot competition with investors to acquire properties across Sydney. Now, prices are easing as interest rates go up and the property market is returning to conditions that were considered ‘normal’ until the pandemic-inspired boom took off.

At the first auctions after the federal election, 472 Sydney properties were sold with a clearance rate of 58 per cent and a median price of $1.545,000. The clearance rate for the whole month of May was 55.9 per cent which was the lowest point in the past 12 months; the North Sydney and Hornsby regions were the only areas with a clearance rate above 60 per cent.

Domain’s Melissa Heagney explains why the clearance rate is important: “Clearance rates are an indicator of whether the property market is rising, falling or remaining steady, with rates above 70 per cent pointing to an annual house price rise of at least 10 per cent. Anything below 60 per cent broadly points to a fall in prices and a weakening market.”

So, FOMO (Fear of Missing Out) is gone, and buyers are getting more selective about the property they want to acquire, and with the advertised listings up 5.1 per cent higher than a year ago there’s a good range of properties on offer.

CoreLogic figures show Sydney dwelling prices fell 0.5 per cent for the three months to April, followed by a 1 per cent fall in May. However, prices were 14.7 per cent higher in Sydney for the 12 months to April so there’s still a way to go before prices get into negative territory relative to their gains in the past year.

CoreLogic's research director Tim Lawless said several factors had affected national housing prices since the rate of price growth peaked in May 2021: "Since then, housing has been getting more unaffordable, households have become increasingly sensitive to higher interest rates as debt levels increased, savings have reduced and lending conditions have tightened," he noted.

"Now we are also seeing high inflation and a higher cost of debt flowing through to less housing demand,” he said, adding: “With stock levels now higher than normal across Australia’s two largest cities, buyers are back in the driver’s seat.”

However, not all would-be buyers have a lot of firepower in their pay-packets. Figures from the Australian Bureau of Statistics show that wages rose by 2.4 per cent over the year to March, while the latest property data from CoreLogic shows Australian dwelling values rose 16.7 per cent over the year to April — nearly seven times as fast as wages. Until this situation reverses, and wages begin to rise at least at the same rate as house prices, there’s no broad-based support for wage increases restarting the housing boom we saw in 2021.

And even if wages do rise a bit faster, it might not help much to reduce growing unaffordability according to NAB senior economist Gareth Spence, who says: “We have [forecast] housing prices slowing this year as interest rates and expectations strengthen, and then declining next year, but after that, we think they normalise to around wage growth…we have wages growth getting to about 3.5 per cent eventually.”

He said that price falls would improve housing affordability in one way, but this would be offset by higher interest rates on mortgage repayments: “What you’re losing on the price you’re gaining on servicing the mortgage anyway, so in net terms are you that much different? Not too much,” he told the Herald’s Elizabeth Redman.

Profits for most sales

Smaller houses have taken the biggest hit to property prices in the cooling Sydney market, with buyers less willing to compromise on the size or quality of their next home. Two-bedroom houses have seen the sharpest pull back in prices. In the past quarter the two-bedroom median fell 5.2 per cent, or $51,500, to $940,000, with smaller declines recorded for three-bedroom (-2.7 per cent) and four-bedroom (-2.9 per cent) houses, which also recorded stronger annual growth.

However, PropTrack economic research director Cameron Kusher said he expects a turnaround in demand for smaller houses in coming months: “I think six to nine months down the track, we’ll see the smaller houses – because they are more affordable – they’ll be outperforming and showing better growth than four- to five-bedroom properties,” he said.

CommSec chief economist Craig James said CBA expected house prices to flatten this year, then fall by 8 per cent, noting that this fall could be greater if the Reserve Bank takes a more aggressive approach to its rate increases: “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.

It must be remembered when we’re talking about the recent massive gains in housing prices, much of this was the result of actions taken by the federal government and states to counter the Covid pandemic which at the onset was expected to hit our economy so badly that house prices would fall from 10 to 20 per cent. 

Instead, in the two years following the arrival of the pandemic Australia’s house prices shot up 31 per cent. Also, in just the six months between February and September in 2021, the median new mortgage increased by $80,000 which was more than one-and-a-half times the average annual income.

But not every property being sold lately has delivered some lucky owner a profit. Figures from Domain show that more than one in ten Sydney homes sold in the December quarter made no paper profit or even a loss. 13.3 per cent of sales in Parramatta were loss-making in this time, followed by Strathfield (13.1 per cent) and Ryde (11.6 per cent).

What these areas have in common is that they are apartment-heavy and have recently had a lot of new supply at a time when international borders were closed. Domain also tells us that across Australia 93.8 per cent of resales in the December quarter made a paper profit and houses were more likely to turn a profit than apartments.

As for upsizers wishing to move out of their apartment and purchase a free-standing house, they’re now facing a record gap between the prices of units and houses because the median Sydney house price is double that of the median unit price, according to Domain data. 

This data shows that more than $794,000 now separates Sydney’s median house price of almost $1,591,000 and the city’s median unit price of about $796,500. This has happened quickly with the gap climbing from 54 per cent in late 2019 to just below 100 per cent in the last quarter. Despite Sydney’s cooling property market – with house price growth flatlining and unit prices down 1.2 per cent last quarter – the record price difference remains.

House prices have grown six times faster than unit prices over the past two years, although at present house price growth has flatlined while unit prices slipped 1.2 per cent last quarter. However, the gap is anything but uniform, and the reason is geographic.

A closer look shows the premium paid for houses varies greatly across Sydney with the smallest difference found in the more affordable outer suburbs and the Central Coast; the greatest difference is found in the city’s east, north shore and inner west. For example, median house prices in Vaucluse are more than five times higher than unit prices, while house prices are at least four times higher in Bellevue Hill, Mosman and Strathfield.

Interest rates and mortgages

As the Reserve Bank starts a series of interest rate increases, the cash rate is still just under 3 percentage points below underlying inflation, an indication that the RBA’s monetary policy remains expansionary. In its June meeting the RBA surprised financial markets with the biggest one-month increase in official interest rates in more than two decades – a new cash rate of 0.85 per cent, an increase of half a percentage point,

The Herald’s Shane Wright says the average new mortgage in NSW is now $800,000 with monthly repayments about $3257 after the RBA’s first rate increase: “A full percentage point increase would take the average repayment to $3592. Financial markets believe the RBA could have the official cash rate at 2.5 per cent by year’s end, which would translate into a monthly repayment on an $800,000 mortgage of $4295.”

Moody’s Investors Services vice-president Alena Chen outlined how the RBA’s forthcoming series of increases will affect the housing market: “Interest rate rises will pose the most risk for mortgages with high balances and for those whose repayment amounts are close to borrowers’ maximum repayment capacity. 

“Rate rises will also weigh on house prices, adding to risks of home loan delinquencies and defaults as borrowers in financial trouble find it harder to sell their properties at high enough prices to repay their debt,” she said.

ANZ senior economists Felicity Emmett and Adelaide Timbrell say the cash rate will lift to 2.35 per cent by the middle of next year – lower than the market consensus figure of 3.25 per cent – and that this will limit borrowing and spending capacity. 

“While fixed rates have already risen sharply, the steep increases in the cash rate will flow through to variable mortgage rates, lifting minimum repayments significantly and reducing borrowing power. Macroprudential tightening, solid supply and constrained affordability will also be headwinds for house prices,” they wrote.

With a recognition that a number of price increases expected in almost every household’s regular purchases will increase the costs of living for most Australians, NAB’s chief executive Ross McEwan said homeowners are more vulnerable to price rises than businesses: “Pretty much everything they touch has got more expensive; That does hurt household income, they’re less flexible about what they can do,” he said.

Another consequence of rising house prices will be the rising cost of rentals. First, because landlords with mortgages will pass on their higher monthly repayments to tenants, and also because of the growing shortage of rental accommodation available. Would-be first-home buyers will also have a reduced chance of obtaining a housing loan and many will be back in the rental queue instead of trying to buy a property.

Nationally, CoreLogic’s Hedonic Rental Index increased 1.0 per cent in May, taking the quarterly rate of growth to 3.0 per cent, up 60 basis points on a year ago. The annual change in rents is now 8.8 per cent across the combined capital cities and 10.8 per cent across the combined regions.

Affordability concerns

A report released by think tank Per Capita found the rate of home ownership is declining rapidly, particularly among those under 40. It estimates that fewer than 55 per cent of people born after 1990 who are now in their 20s and 30s will own a house by the age of 40, compared to a historical high of 72 per cent.

The Per Capita report said that the proportion of people who own their homes without a mortgage has shrunk by a quarter in the 20 years between 1997-98 and 2017-18, from about 40 per cent of the population to now just under 30 per cent. The report also noted that out of 10.5 million dwellings in Australia, about 37 per cent of Australians are owner-occupiers with a mortgage, about 29.5 per cent own their home outright, 27 per cent rent from a private landlord, and 3 per cent rent from state or territory housing.

More figures showing the gap between homebuyers and investors come from the Herald’s John Collett who tells us: “The number of first home buyers has been falling since early last year in the face of rising prices, with new lending in March down about 25 per cent on a year earlier, figures from the Australian Bureau of Statistics show.

“However, the value of new loan commitments to investors was almost 50 per cent higher over the same period, as those buyers see better yields as rents rise. Some properties that were negatively geared may generate real income if rents continue their current trajectory.”

Executive director of Per Capita, Emma Dawson, says that social and affordable housing construction has declined over the past 30 years: "We're simply not building enough public housing and community housing to meet the needs of the nation," she argues.

There’s a growing gap between those who own a home and those who wish they could, and the recent election brought a seriously political tone to the housing affordability debate. The simple fact that high housing prices are so well-liked by homeowners has influenced Labor to reject the set of policies it took to the last election – which it lost. Instead, they went into the 2022 election with a vastly different approach and won.

A Labor spokesperson outlined the government’s new policy settings: “Through our National Housing Affordability and Supply Council and National Housing and Homelessness plan, an Albanese Labor government will look to work with all levels of government and other stakeholders to make it easier for more people to buy a home.”

The new Prime Minister, Anthony Albanese has positioned the federal government as an investor in housing with its ‘Help to Buy’ policy.  Labor will, in one way or another, contribute to the purchase of new and existing homes for 10,000 people each year. The party has also promised to increase the supply of social and affordable housing by funding the construction of 30,000 homes over the next three years. 

Centre for Independent Studies chief economist Peter Tulip said that the federal government could do more to help with housing affordability but wasn’t doing enough: “It’s woefully inadequate,” he said. “Several hundred thousand people buy a new house every year. There are several million families renting. The policies of the two major parties do nothing for almost any of them.”

He says planning restrictions have reduced housing supply and raised prices, further dividing the haves and have-nots:  "Housing policies ensure continual wealth gains for current homeowners while leaving renters and potential buyers locked out of the market; for both equity and efficiency reasons, we should be encouraging higher-density housing instead of stopping it."

There’s an often-repeated justification for existing negative gearing and other taxation benefits – namely that they encourage the building of new properties and help to generate new housing supply. However, a recent analysis by the Parliamentary Budget Office found that 57 per cent of negative gearing deductions go to the top 20 per cent of income earners, and the top 10 per cent of earners claim more in capital gains tax deductions than the remaining 90 per cent in total.

The analysis also found that across Australia 638,000 people own two or more investment properties, accounting for 1.7 million homes, while a bit further up the wealth ladder 11,200 individuals own seven or more investment properties. The government’s taxation benefits are most  certainly used to increase wealth and property sales, but do little to stimulate new construction.

Grattan Institute economic policy program director Brendan Coates said the capital gains tax breaks have been a “free kick” to investors and have ultimately driven housing inequality: “Negative gearing and capital gains tax definitely contributed to the growing divide between the housing haves and have-nots. You’re talking about $63 billion a decade that is flowing to the richest Australians, which are the ones who own multiple investment properties.”

One thing the federal government could do to possibly lower the cost of buying a home is to financially encourage the state and territory governments to do away with stamp duties on property transactions and replace the lost revenue by imposing a broad-based land tax that would apply across Australia. In theory, this would have the effect of saving homebuyers in NSW around $60,000 on their housing purchase, although it’s doubtful this ‘savings’ would actually eventuate.  

On June 12, NSW Premier Dominic Perrottet announced his intention to do away with stamp duty and introduce a new broad-based land tax in his last budget before the March 2023 election, but details are yet to be outlined. Of course, this would mean all existing homeowners affected will face a new and not inexpensive annual tax on their own property which would make it a hard ‘sell’ for any government – state, territory or federal, to impose such an impost without suffering political damage. We’ve covered this issue since it first arose four years ago and will continue to monitor and report on developments as they happen.

Forecasters’ updates

There’s a surge of new commentary and forecasts about the property market from the banks and the property industry, taking the latest market conditions into account. 

With a just-elected federal government, interest rate rises and with major international developments all having their impacts, what do those closest to the action have to say? Domain’s Melissa Heagney surveyed the experts and here’s what she found.

CBA senior economist Gareth Aird said the policies of the new government won’t be enough to soften the impact of rising interest rates and the rising cost of living on Australian households: “Regardless of who won the election, rising interest rates will be the one thing that shapes economic outcomes and the future of the housing market,” Aird said, reminding us that CBA economists have predicted an 11 per cent fall in Sydney house prices this year, followed by a further 7 per cent drop next year.

AMP Capital chief economist Shane Oliver said his firm has updated its predictions to incorporate the latest house price data and now expects a 10 to 15 per cent drop in house prices over the next 18 months, rather than 2 years.

Westpac senior economist Matthew Hassan said his bank has forecast a price fall of 2 per cent across the country by the end of the year, and a further 8 per cent in 2023: “Our recently revised forecasts have the cash rate rising to a peak of 2.25 per cent by May 2023 and holding at this level through 2024. This, in turn, is expected to see an earlier and sharper correction for dwelling prices.” 

ANZ senior economist Felicity Emmett said her bank’s forecast has been updated to house prices falling nationally by 3 per cent by the end of the year and 8 per cent next year: “Higher interest rates are going to be the biggest challenge for the market but record-low unemployment and the reopening of international borders – these things will help to provide some support over the next couple of years.”

NAB chief economist Alan Oster said his bank’s forecast was for a housing price rise of 2 per cent this year, followed by a fall of ten per cent next year: “Affordability, interest rates and people getting worried about interest rates will have an impact,” he said.

Brett Thomas at News.com also looked at the market. He spoke with Real Estate Institute of Australia president Hayden Groves who said the market “can carry on” but there may well be a price retracement because of multiple potential interest rate rises over the course of the year.

“But if prices do fall back, I don’t think it will be as substantial as some commentators are expecting,” Mr Groves said.

Housing Industry Association economist Tim Reardon agreed, saying: “As interest rates increase, the high growth cycle will stall and we’ll enter a different cycle where prices will decline but it’s difficult to see house prices falling significantly while we still have a shortage of supply,” Mr Reardon said.

PropTrack economist Angus Moore said the momentum has gone out of prices, but it was too early to put a percentage figure on the expected decline: "If the RBA has to raise rates quicker than we're expecting in order to tame inflation, we could see reasonably large falls in prices – a double-digit decline is not implausible,” he said.

Independent economist Saul Eslake said he did not expect to see a large decline in prices. He said he would be surprised if the market dropped more than 10 per cent as rates rose, also noting that forced selling was unlikely. Instead, he said he expects the number of homes for sale to fall quite a lot as vendors become reluctant to sell in a cooling market. This would reduce supply and limit price declines.

The property market is returning to conditions more like those that were considered ‘normal’ before the pandemic-inspired boom, before the war in Ukraine, before energy costs skyrocketed, before interest rates began to rise, and before the spectre of higher inflation returned. 

There’s general agreement that interest rates will rise and housing prices will fall, but how high rates will go and what the amount of the price falls will be depend on so many variables that at this point in time even the industry and financial experts can’t predict just what’s going to happen next.

Sources:

‘Aussie home values are about to tumble. We should let them,’ Jessica Irvine, Sydney Morning Herald, 14 June 2022
‘NSW to phase out stamp duty, introduce land tax,’ Alexandra Smith, Sydney Morning Herald, 13 June 2022
‘House prices to drop by 15 per cent in Australia, according to CBA,’ Sarah Sharples, News.com.au, 12 June 2022
‘The Sydney regions where auction clearance rates have been hammered,’ Kate Burke, Domain, 11 June 2022
‘Why property prices could fall faster than first expected,’ Kate Burke, Sydney Morning Herald, 9 June 2022
‘A very clear jolt’: Why house prices are tipped to fall even further,’ Melissa Heagney, Domain, 7 June 2022
‘Home buyers brace for financial pain as economy sits on knife-edge,’ Shane Wright, Sydney Morning Herald, 4 June 2022
‘How rising interest rates could affect first home buyers,’ Chloe Breitkreuz, Domain, 27 May 2022
‘Housing market in correction mode as rate hikes kick in ,’ Matthew Hassan, Westpac Wire, 20 May 2022
‘CoreLogic Home Value Index records first national fall since September 2020, as declines accelerate across Sydney and Melbourne in May,’ CoreLogic Research News, 1 June 2022
‘Market correction expected as interest rates rise,’ Brett Thomas, realestate.com.au, 28 May 2022
‘Reserve Bank says property market buoyed as households downsized,’ Shane Wright, Sydney Morning Herald, 25 May 2022
‘There’s a new government, so what’s next for house prices?,’ Melissa Heagney, Domain, 24 May 2022
‘Property prices have risen seven times faster than wages in a year. Can it continue?,’ Elizabeth Redman, The Sydney Morning Herald, 20 May 2022
‘The homes with the largest price drops in the cooling market,’ Kate Burke, Domain, 19 May 2022
‘ANZ predicts a worse housing market slowdown,’ Michael Bleby, Australian Financial Review, 18 May 2022
‘The other housing tax no one’s talking about this election,’ Elizabeth Redman, Domain, 18 May 2022
‘Sydney upsizers face record gap between unit and house prices,’ Kate Burke, Domain, 15 May 2022
‘Why falling property prices are actually bad news for first home buyers,’ John Collett, Sydney Morning Herald, 11 May 2022
‘More interest rate hikes are coming, and housing affordability is about to get crunched,’ Greg Jericho, The Guardian, 6 May 2022
‘Negative gearing and capital gains tax breaks go to top income earners and men,’ Tawar Razaghi, Domain, 5 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
To make housing affordable, property prices need to fall, hurting many Australians with big debts,’ Nassim Khadem, ABC News online, 6 May 2022
‘Higher rates to hit house prices and home buyers, Moody’s warns,’ Shane Wright and Rachel Clun, 5 May 2022
‘Housing affordability challenge requires leadership and vision,’ The Herald's View, 4 May 2022