Market comment: The Unanswered Questions Continue

Wed, 14 Dec 2022

Market comment: The Unanswered Questions ContinueUnanswered Questions. They just keep coming !

In November, Australian home values lost slightly more than one per cent based on CoreLogic's 5 capital city index, bringing the cumulative fall to 7.7 per cent since the market's May 2022 peak. Sydney prices have fallen by 11.4 per cent from their highest point.

CoreLogic’s data gives a capsule image of the Sydney market that shows housing values were falling at the monthly rate of 2.3 per cent three months ago, according to CoreLogic research director Tim Lawless, but now the monthly rate of decline has fallen to 1.3 per cent in November. This could mean buyers are adjusting to increased interest rates as well as the market experiencing lower stock levels, with both leading to smaller value declines.

CoreLogic head of Australian research Eliza Owen said that the pace of the housing market’s decline has been slowing overall: “The high-end markets of Sydney and Melbourne, even though they’ve had the most deceleration in the pace of falls, they’ve still had the biggest falls overall,” she said.

“Maybe because price falls occurred earlier and were more intense, that’s where we’re starting to see maybe a little bit of a correction in that trend now.”

BresicWhitney chief executive Thomas McGlynn says there has been a stabilisation in inner-city suburbs within 10km of the Sydney CBD. He says this is shown by improving clearance rates across the eastern suburbs, inner west and lower north shore. He also said buyers can have more comfort in terms of their mortgage repayments to think that the end of the interest rate tightening cycle is in sight, making it easier to buy and sell in the same market.

But the market recovery is yet to happen. AMP Chief Economist Shane Oliver says property prices will fall further in the second half of 2023: “Rising mortgage rates are the main driver of the slump and there is likely more to go,” Mr Oliver said.

“Since April a buyer on average full-time earnings with a 20 per cent deposit has seen a 25 per cent decline in their home buying power. We continue to expect a 15-20 per cent top to bottom fall in home prices out to the September quarter next year, followed by a gradual recovery,” he said.

Economists from the ANZ Bank think that Sydney prices are likely to fall a total of 12 per cent this year and another 8 per cent in 2023. ANZ economists Felicity Emmett and Adelaide Timbrell said interest rates are now weighing down a property market that experienced the biggest price rise in prices in a generation during the COVID-19 pandemic.

“With our expectation that the cash rate will peak in May next year, we think that most of the impact on prices will be fully reflected by the end of 2023,” they told the Herald’s Shane Wright.

“In 2024, as policy stabilises and then eases late in the year, we expect to see a modest recovery begin to emerge in house prices and look for gains of around 5 per cent by end-2024.”

Nila Sweeney, writing in the Australian Financial Review, says that the recent interest rate rises have already generated a drop in house prices across 98.3 per cent or 534 out of 543 Sydney suburbs, led by the northern beaches and eastern suburbs. Her analysis found that house prices across Balgowlah, Bayview, Seaforth, and Avalon Beach on the northern beaches have dropped by 11.4 per cent, 11.1 per cent, 10.6 per cent and 10.5 per cent respectively, while in Sydney’s eastern suburbs Bronte house prices fell by 11.3 per cent and Bellevue Hill by 10.3 per cent during the same period.

Housing prices in some Sydney suburbs have already fallen to levels below where they were in March 2020 when the pandemic first hit. These include the inner-city suburbs of Darlinghurst (-3.7 per cent), Surry Hills (-12.8 per cent), Forest Lodge (-9.7 per cent) and Redfern (-9.7 per cent), all of which recorded the sharpest falls in median house values since the pandemic hit, CoreLogic figures show.

No early ending

The property market got an unwanted early Christmas gift when, on December 6, the Reserve Bank took the official cash rate to its highest level in 10 years, raising interest rates by a quarter of a percentage point to 3.1 per cent in its attempts to bring inflation under control. This was the eighth consecutive monthly rise, but as there is no RBA meeting in January that’s most likely to be the cash rate in place until at least February 2023.

RBA Governor Philip Lowe explained the board’s reasoning: “Inflation in Australia is too high, at 6.9 per cent over the year to October. Global factors explain much of this high inflation, but strong domestic demand relative to the ability of the economy to meet that demand is also playing a role.” 

The Sydney Morning Herald estimates that, if the banks pass the RBA’s increase on in full, the average discounted mortgage rate will rise to 6.45 per cent. With each rise in interest rates, mortgage repayments have risen and the amounts borrowed have been reduced accordingly. 

If you’re wondering how high the RBA’s prime interest rates will go, bank economists’ forecasts generally range from a peak of 3.35 per cent (CBA) to 3.85 per cent (Westpac). This is an important figure for all potential borrowers as it will determine the amount of the monthly repayments on their loans, and we’re already at the peak rate forecast by the CBA.

The AMP’s Shane Oliver did offer a glimmer of hope by telling’s Sarah Sharples that he believes the cash rate has now peaked — but with a high risk of one final 0.25 per cent hike to 3.35 per cent in February. By the end of 2023 or early 2024 he expects the RBA to start cutting rates.

“Our base case is that we are now at the peak, albeit with the high risk of one final 0.25 per cent hike to 3.35 per cent early next year,” he said.

What might happen once interest rate rises slow down or even come to a halt? Alex Turner-Cohen from foresees ‘a massive change on the horizon, with prices possibly set to skyrocket’. He says Sydney will lead the recovery and the NSW capital will experience the largest gains of up to 12 per cent in its property sphere. But there is a proviso.

He says his predicted skyrocket could happen because “of the rise in overseas arrivals, the return to the office, the existing shortage of rental accommodation, the new stamp duty/land tax changes and the expected ongoing strength of the Sydney economy.” All this is based on Louis Christopher’s ‘Housing Boom and Bust report for 2023’ which is highly optimistic to say the very least.

Louis Christopher is the Managing Director of Sydney-based SQM Research. He says that “No doubt it will be a very challenging year for the RBA to walk their tightrope and pull off a soft landing for the Australian economy. However, contrary to current popular opinion, I believe they will manage to do just that.”

SQM’s Housing Boom and Bust Report forecasts capital city house prices will rise between 3 and 7 per cent once interest rates stop rising. The report's "base case" hinges on the RBA not raising the cash rate above 4 per cent, inflation dropping to 5 per cent, and unemployment staying below 5 per cent. 

"If the [cash rate] target rate stays below 4 per cent, then it is unlikely we will have a flood of forced sales in the housing market," Mr Christopher said. He also forecast Sydney will see the biggest lift in property values of between 5 and 9 per cent. “There is, of course, a risk the RBA may need to go further. If they do, then the risks of a hard landing in the economy do substantially rise and, thus, a hard landing in the housing market would also occur."

Opinion from data compiler PropTrack provides some details about our current situation. Data compiled exclusively compiled for, found that 144 suburbs in Australia have lost their places in the million-dollar property club since interest rates began rising in May, and of those NSW had the most suburbs that suffered from median price plunges that cost them their million-dollar status. In all, 63 suburbs in the state dropped out of the seven-figure threshold.

Matthew Hassan, senior economist at Westpac, says: “The downturn has become more firmly entrenched in most markets, while price-driven improvements in affordability are being negated by rising interest rates and deteriorating expectations for prices and labour markets.

"Overall, it looks to us like we’ve got another 12 months of price declines ahead, but they’re likely to be at a milder pace than we’ve seen through 2022," Mr Hassan said.

The other three of Australia’s Big Four banks also see falls into 2023. NAB expects combined capital city prices to decline 7.3 per cent this year and 11.4 per cent in 2023. ANZ says it too expects house prices to fall next year. While the Commonwealth Bank (CBA) has the most positive outlook saying it expects house prices to continue to fall 15 per cent from the April peak to the trough in the middle of 2023. 

Affordability decreasing

Figures from the Australian Bureau of Statistics (ABS) show that property values across Australia rose 66.6 per cent during the past decade while wages were up by only 25.2 per cent. In NSW home values rose three times faster than wages.

CoreLogic agrees that growth in wages has been completely outstripped by property price growth over the past decade. Their findings show that home values have climbed at more than twice the rate of wages, making it increasingly difficult for homebuyers to enter the Sydney property market.

CoreLogic’s Eliza Owen says that despite recent growth in wages there’s been very little improvement in affordability for homebuyers, especially for those wanting to buy their first home: “The cost of debt has risen substantially as [interest rates rise] so it doesn’t necessarily mean a vast improvement in affordability, but it does give people a chance to catch up in their savings,” she said, adding that home values nationally would need to fall 20 per cent just to offset the effects of rising interest rates.

Moody’s Investors Service confirms that housing affordability is deteriorating despite property price declines. It says that by October new borrowers needed 31.6 per cent of average household income to meet monthly mortgage repayments, compared to 25.8 per cent in January: “While house prices are declining, rising interest rates over 2022 and any further rate rises in 2023 mean affordability for new borrowers is poor and will remain so over the next year,” it said.

Modelling by BetaShares, an Australian fund manager specialising in exchange traded funds, found that the national mortgage repayments ratio is currently 42.8 per cent of incomes — the highest level since the September quarter of 1990 when it was 45.5 per cent. This means that the repayment burden is the worst since the 1990s, despite double-digit mortgage rates then, because the national house price is now 6.2 times the average after-tax annual household income.

BetaShares also found that the mortgage repayment ratio in Sydney reached 57.8 per cent in the current quarter, worse than the GFC peak of 47.2 per cent. The company’s chief economist David Bassanese said home buyers are facing the worst mortgage affordability since the 1990s. He also said that mortgage affordability levels could be even worse than the 1990s if the RBA increases rates by about another percentage point, which many financial analysts have already predicted. 

Mortgage holders are classified as being ‘at risk’ if  from 25 to 45 per cent of their after-tax household income is spent on their home loans, depending on income and spending. This stress is expected to impact one in four mortgage holders by the end of January 2023.  

Roy Morgan research figures show that mortgage stress has already increased to its highest level since April 2018 with more than one out of five mortgage holders considered ‘at risk’.

Refinancing growing

New home loan commitments fell by 2.7 per cent in October. A fall in borrowing by first-home buyers has been especially noticeable because their loan commitments fell by 3.2 per cent as interest rates have taken their toll. The number of first home buyers entering the market is 47 per cent below the January 2021 peak of 16,187.

But refinancing of existing loans is at record highs, according to the ABS Head of Finance and Wealth, Katherine Keenan: “Monthly owner-occupier refinancing between lenders has remained above $12 billion since June 2022, well above pre-pandemic values,” Ms Keenan said. “Investor refinancing activity has also remained high.

"Almost half of loans taken out in the middle of 2021 were taken out on a fixed-rate basis, which is unusually high for Australia," CEDA economist Andrew Barker told ABC’s Emily Stewart. He said that, while homeowners with variable interest mortgages have been dealing with regular increases as the cash rate goes up, fixed-rate borrowers face a massive jump in their repayment ‘overnight’. 

"[It is] particularly those who bought at the peak of house prices during the pandemic who may have more problems — and they're the ones that the banks really need to monitor," Mr Barker warns. He says that the rise in interest rates for many of these recent buyers is likely to be made even tougher on borrowers by uncompetitive variable rates that some on fixed-rate loans will have to roll on to.

The ABC’s Peter Martin says about two-thirds of the fixed-rate mortgages will expire in 2023: “Many were taken out at fixed rates of around 2 per cent. Depending on how high the Reserve Bank pushes things, those borrowers will suddenly find themselves paying 6-7 per cent.”

Both owner-occupiers and investors are still refinancing their home loans at “extremely elevated levels”, according to RateCity research director Sally Tindall: “Refinancing might have dropped again this month but it’s still at near record highs, with over $17 billion worth of loans refinanced in just one month,” Ms Tindall said.

“While banks are scratching around for brand new borrowers, they’re busy poaching existing ones from their competitors. Banks are throwing everything but the kitchen sink at customers willing to move their mortgage on to their books, with rate discounts and cashbacks at the ready to woo new business” she said.

Sarah Sharples of tells us that RBA data from October shows there’s a 0.51 per cent difference between the interest rates existing borrowers are paying compared with new customers responding to special offers: “New borrowers are securing an average variable rate of 4.58 per cent compared to the much higher rate of 5.09 per cent afforded to existing borrowers,” she wrote.

And while we’re talking about borrowers, over the last decade one relatively new lender has become the tenth biggest lender in Australia, according to data from research firm Digital Finance Analytics (DFA). It tells us that back in 2010 the ‘Bank of Mum and Dad’ helped only about three per cent of first-home buyers.  Now, DFA calculates that 45.8 per cent of first-home buyers sought assistance from their parents to buy a property during the September quarter, and the average level of help was over $107,000.

Housing construction slows

Housing construction is an important sector of our economy that has seemed somewhat immune to the impacts of our current economic conditions, although lending for the construction or purchase of new homes fell 0.9 per cent in October, its lowest level in more than three years. 

However, Housing Industry Association (HIA) Economist Tom Devitt said the RBA’s rate hikes haven’t yet had their full impacts on the construction industry: “Building approvals have been sustained in recent months by the record number of home sales prior to the first increase in the cash rate that still haven’t been approved, much less commenced construction,” he said.

“The full impact of the rate rise will not be observed in approvals data until 2023 when the pool of earlier sales is exhausted.”

Nathan Mawby from writes that Australia’s home building boom is ‘all but over’. He says that housing construction is expected to plunge to a decade low in 2024, and it could take action by the federal government to reverse the decline.

Mr Mawby refers to a new HIA report that surveyed the nation’s biggest home builders and concluded the speed of the boom’s decline is accelerating after a 22.8 per cent slump in the number of new detached house starts in October was even more severe than the 15.8 per cent drop recorded in the three months between June and September.

HIA now anticipates that, after starting a record 150,000 new houses in 2021 nationwide, there will be just 101,000 commenced in 2024. HIA chief economist Tim Reardon warned it would still take years for the Reserve Bank of Australia’s seven increases to the cash rate to be fully felt due to a significant pipeline of approved new builds.

“But it is very clear, even before the October and November increase in the cash rate start to impact on sales, that this building boom is coming to an end,” Mr Reardon told

Landlords and tenants

Rents, already high and still rising, are expected to continue their upwards momentum. Nationally, rental rates have risen by a record 10 per cent over the past year while the number of available properties remains critically low by historical standards. ANZ Bank said in the month to November 13, the number of properties available for rent per week was just 96,000, down 36 per cent on the five-year average and down 46.6 per cent compared to the same period a year earlier.

In November the number of vacant properties rose slightly – up 3.1 per cent from October, but Domain chief of research and economics Dr Nicola Powell said this was a seasonal rise as the rental market moved into the busy change-over period and would do little to improve the situation for renters.

SQM Research figures show that between March 2020 and January 2022, national asking dwelling rents rose by 14.3 per cent. Many families that once might have been able to buy their first home are now taking longer to save a deposit; this is reflected in surveys that now show the median age of first home buyers is now closer to 40 than 30. 

To buy a median unit in Sydney, a 20 per cent deposit would be over $150,000 and it’s hard to save up that much while paying high rents each month. The SGS Economics’ rental affordability index shows falls in affordability of up to 14 per cent in some parts of the country over the past 12 months. 

The SGS index also shows that in Sydney, the least affordable areas for renters are around the north shore suburbs of Balgowlah, Seaforth, and Manly. The eastern suburbs and an area around Mascot and Sydenham are also relatively unaffordable. The most affordable places in Sydney are across the western and south-western suburbs including Whalan, Blacktown, Cabramatta and Bankstown.

In Sydney, on the supply side, Domain figures show the lowest vacancy rates were in middle and outer areas such as Penrith, Camden, Campbelltown, Bankstown and Sutherland, which all recorded a rate of 0.5 per cent.

Greg Taylor, director of Stanton & Taylor Real Estate in Penrith, said rental demand in in his area had jumped at the start of the pandemic, and had continued since, as more people moved to the area for better affordability. At the same time, rental supply had reduced, as some landlords cashed out of the market, while other potential investors sat on the sidelines as property prices soared.

SkyNews recently carried a story based on statistics from estate agents trade body Propertymark that the number of landlords selling up has risen by 13 per cent in the four months from July to October. They point out that this exodus by landlords could lead to an even bigger shortage of rental properties, saying: “We are seeing different ‘groups’ of people converging, and all competing for the same space within the rental sector.

“A lack of affordable housing is, at the same time, exerting pressure from another direction. Despite a housing market dip with property prices falling, many households aspiring to own their own property are unable to save up.”

The majority of the properties now being offered for sale are owned by landlords whose primary goals are for rental incomes and capital gains. Dr Chris Martin, Senior Research Fellow in the City Futures Research Centre at UNSW, says half of the investors in a recent survey said they’d sold their investment properties to realise capital gains. 47 per cent said they wanted money for another investment, 36 per cent said the rental income was insufficient and only 14 per cent said there was another reason for their decision to sell.

“The point we’re making, and the evidence shows, is landlords are disinvesting all the way to the bank all the time. They are selling properties because it suits them and plenty of them get back into property again also because it suits them too,” Dr Martin told Domain’s Tawar Razaghi.

Fertile fields

An interesting story about the effects of housing conditions on Sydney’s population statistics comes from Terry Rawnsley, a KPMG demographer and urban economist, who authored a report showing that fertility rates in the inner suburbs of our two biggest cities have fallen to very low levels. 

Mr Rawnsley has concluded the cost of housing in Sydney and Melbourne is having a major effect on fertility patterns, pointing to huge differences in fertility rates between wealthy inner-urban suburbs and outer suburbs where rates were relatively healthy: “When you’re living in a two-bedroom inner-city apartment, having two or three children is challenging,” Rawnsley says. “Areas with larger and more affordable housing tend to have higher fertility rates.”

In a separate but related study, Macquarie University demographer Professor Nick Parr concluded that childbearing is being “compressed into the later part of the reproductive age period” across much of Sydney. Professor Parr analysed birth rates across the city’s suburbs between 2011 and 2015 and found that, in virtually every neighbourhood to the city’s north, east and inner south, more than 70 per cent of births were to women aged over 30. Each one of those districts has very high property prices.

The latest Commonwealth census shows that Sydney has a “ring” of suburbs surrounding Sydney Harbour where numbers fell in the five years to 2021. For example, the population of Sydney’s eastern suburbs contracted by 2.1 per cent between 2016 and 2021. Meanwhile, suburbs on the outskirts of the city, despite inferior transport and other services, have experienced massive growth. 


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