Market comment: ENJOY THE RIDE

Tue, 21 Feb 2023

Market comment: ENJOY THE RIDEA buyer’s market as price declines start to slow

The most recent peak in Australia’s house prices was in May 2022, and since then they’ve fallen by 8.4 per cent. Median values dropped in more than 2400 house and unit markets nationally in 2022, CoreLogic’s Mapping the Market Report shows, with the downturn spreading to 51.7 per cent of analysed suburbs. Declines were far more widespread in Sydney where house values fell in 98.7 per cent of suburbs over the year, while unit values dropped in more than 95 per cent of Sydney suburbs. 

The report also shows that Sydney was the first market to peak, back in January 2022, and its values fell 12.1 per cent last year, leaving medians in very few suburbs untouched. Domain’s Kate Burke and Melissa Heagney-Bayliss say this is the steepest annual fall on record with Sydney’s median house price falling by more than $170,000 to $1,413,658. Sydney units fell to a median $748,422. 

However, there are a couple of positives in the latest statistics; the pace of declines slowed in the December quarter, and house prices are still 24.2 per cent higher than when the market bottomed in mid-2020. History shows us there will be a turning point in housing prices at some time in the future and it could lead to gains in some parts of Sydney before the end of 2023.

Lloyd Edge, the managing director of Sydney buyers’ agency Aus Property Professionals, says it’s still going to be a buyers’ market for the next six to 12 months: “We’re seeing interest rates starting to stabilise and there might be only one or two more rate rises which’ll be a good thing,” he said.

“Vendors are being a bit more realistic in their expectations, prices will still be down a bit and there’ll be more choice and less competition. In addition, rents are really high so they’ll encourage first home buyers into action.”

Some of Sydney’s premium areas have even avoided the falls and have instead risen in value. These include Cronulla (up 18.8 per cent), Putney (up 13.8 per cent), Vaucluse (up 12.9 per cent) and Lindfield (up 9.4 per cent).  Across Australia the top performing region for house prices was Dural-Wisemans Ferry in Sydney, where values went up by 8.5 per cent over the December quarter.

The market is now favouring larger homes, and while the median price for two-bedroom homes in Sydney fell 10.5 per cent last year, four-bedroom homes dropped just 3.3 per cent. This could mean that a broad recovery will begin in the middle and outer-ring suburbs where there are more properties which appeal to upsizers, unlike the more expensive inner-city areas with generally smaller homes.

Domain chief of research and economics Dr Nicola Powell says during downturns more expensive properties tend to fall in value first and by a greater amount, meaning upsizing and upgrading owners would have just a relatively small window to take advantage of the narrowing gap before the next phase of the property cycle: “If you can hit that sweet spot, it means your leap to the next price bracket can reduce,” she says.

Shane Oliver, AMP Capital’s chief economist, says that 2023 is likely to be another tough year, but it could also be the year that the housing market begins its recovery once the Reserve Bank stops its rate rises.

“If the RBA were to hold [rates] below 4 per cent, given the surge in the economy that accelerated wage increases, I believe that will create grounds for a housing market recovery, albeit a soft one where we would see some single-digit house price rises occur in 2023, or at the very least, a situation where the housing market would stop falling,” Dr Oliver said in an Australian Financial Review article.

Rates still unstable

But interest rates aren’t yet stabilised. The RBA raised the official cash rate to a new 10-year high of 3.35 per cent when it upped it by 0.25 per cent at the Bank’s February meeting. This is the ninth consecutive increase since the rises began in May last year, and Bank Governor Philip Lowe indicated there would be further rates in future which he said would be needed to fight inflation.

A number of economists have expressed concerns about what seems an intention by the RBA to continue raising interest rates based solely on inflationary factors. Australia’s economy is essentially healthy with regards to employment and wages growth. Much of the ‘surplus’ accrued by households during the pandemic has been expended, and households with mortgages are repaying more each year instead of spending it elsewhere. The jobless rate is at its lowest level in half a century and our trade surplus is growing.

KPMG Australia chief economist Brendan Rynne said if the RBA continues with three more interest rate rises over the next six months, households – which account for about 60 per cent of all economic activity – would spend $20 billion less this year, and this would wipe a full percentage point from economic growth.

Like Shane Oliver, CBA’s head of Australian Economics, Gareth Aird also believes that once the RBA starts cutting the cash rate in later 2023, this could lead to a recovery in house prices: “RBA policy decisions from here will drive the demand for credit, which in turn will influence home price outcomes.  Dwelling prices will continue to slide in the short run, but if the RBA takes the cash rate lower in late 2023 as per our forecast then home prices are likely to rise.” 

Kent Lardner, founder of Suburbtrends, says a 10 per cent price gain could occur in select areas in 2023, and once interest rates start to fall gains will be driven by the chronic undersupply of new housing stock and growth in population: “If the gains between 2023 and 2024 match the losses of the last 12 months the average market could see prices improve by 17 per cent,” he said.

The ‘undersupply’ Mr Lardner mentions is showing up in a shortage of new listings. Data from CoreLogic shows that over the year to 8 January, new listings were down 27.6 per cent across the combined capital cities, while total listings were down 6.7 per cent year-on-year. The number of new listings fell by more than 22 per cent in Sydney during the four weeks to 8 January.

Tim Lawless of CoreLogic said the below-average flow of new listings indicates that prospective vendors are waiting for the housing market downturn to end, and the low level of listings could help to offset the impact of interest rate rises on house prices: “Such low advertised supply levels are unusual through a downswing”, Lawless said.

“With the flow of new listings holding well below average across most regions, distressed or motivated sellers remain at relatively low levels in the housing market. The lower inventory levels could provide some support for housing prices, especially if demand drops further as interest rates trend higher”, Lawless said.

Ray White chief economist Nerida Conisbee told the Herald she believes the peak of interest rates will happen early in 2023 and says this will combine population growth and the continuing housing shortage to create favourable conditions for property investors: “We still have one or two interest rate increases to come but, once they cap out, we’ll see price growth start again which will bring investors back to the market,” she said. 

“We tend to weather recessions better than the rest of the world, and we have strong employment and growth, as well as a rising population and a shortage of homes. So, we see good opportunities for investors in 2023.”

As for new homes coming onto the market, data from the Australian Bureau of Statistics shows 
there was a 5.2 per cent drop in the construction of new homes over the September quarter — down 21.2 per cent since September 2021. New construction won’t ease the housing shortage in the near future, but ABS figures show building approvals rose 18.5 per cent in December which was a significant rebound.

In 2022 the home-building industry experienced a supply chain crisis, skyrocketing materials costs and a severe labour shortage. The materials shortages are now beginning to ease as supply chains normalise. Master Builders Australia chief economist Shane Garrett sees the costs of building materials receding: “The product building material supply situation will probably be a little bit more favourable in that prices are likely to slow down,” he said. “The exciting part will be when interest rates start going down again, probably in 2024.”

Mortgage cliff looms

There is a ‘known unknown’ pending and that’s going to be created by mortgage borrowers refinancing some $188 billion in low-interest loans acquired at the time of the RBA’s fiscal stimulus in response to the pandemic’s economic threat. During COVID many borrowers took up the opportunity to fix their interest rate between 1.75 and 2.25 per cent. However, these were only for two or three-year periods and most are expected to expire this year and will need to be renewed at significantly higher interest rates than when they were first taken out.

The head of the RBA’s economic analysis department, Marion Kohler, said it was hard to establish the number of loans this refinancing would affect: “"Around one third of the outstanding housing credit is fixed rate," she said. "We think about half of that is due to roll off in the coming year."’s Tarric Brooker writes about the ‘fixed rate mortgage cliff’ – a term that’s used to describe the situation faced by holders of fixed rate mortgages seeing their terms expire and the low fixed rates rolling off into higher variable rates: “According to figures provided by the RBA, the average owner-occupier fixed rate loan with a term of three years or under, written between the onset of pandemic to the end of 2021, had an interest rate of 2.14 per cent,” he writes.

“Once November and December’s rate rises have been fully priced into the average variable rate owner-occupier mortgage, the rate payable will be about 5.6 per cent. According to an analysis by the RBA, over 50 per cent of households with a fixed-rate mortgage expiring in 2023 face an increase in mortgage repayments of 40 per cent or more, with rates as they stand today.”

Morningstar head of equities research Peter Warnes said $370 billion in fixed rate mortgages had started to roll off and the refinancing process would continue to accelerate: “Most refinancing will see repayments increase significantly, absorbing over 40 per cent of household disposable income. That will alter household consumption patterns meaningfully,” he said.

The rush to refinance has already begun as a record $13.4 billion worth of mortgages held by owner-occupiers was refinanced in November. In total $19.5 billion worth of mortgages was refinanced that month, up 20.4 per cent from a year ago. At the same time, the value of new home loans being approved fell 3.7 per cent to $953 million.

RateCity research director Sally Tindall said the statistics showed borrowers were acting to combat rising interest rates: “Australians are being anything but complacent when it comes to their home loans. They’re switching in droves and that’s fantastic to see,” said Tindall.

Anna Bligh from the Australian Banking Association says the banks are aware that some customers will find it difficult to make higher payments: “They’re in many cases already in discussions with those customers about how they can help – how they can maybe restructure or refinance to make those payments a little easier to make.”

“But for those people who find it really tough, banks are not going to be sitting there watching people fall off the cliff,” she said.
The Reserve Bank has done its own analysis of the impacts on borrowers the ‘fixed rate mortgage cliff’ will create. On the positive side, the Bank believes that 6.5 per cent of borrowers would be completely unaffected by a 3.6 per cent rate, and a further 41.1 per cent would see their household spare cash drop by an affordable 20 per cent. 

About these borrowers the RBA says: "Most borrowers will likely be able to manage for at least two years by reducing their non-essential spending, reducing their saving flows and/or drawing down on their accumulated prepayment buffers."

By RBA estimates, 11 per cent of households with fixed-rate mortgages expiring in 2023 will see their repayments rise by more than 60 per cent. At a 3.6 per cent cash rate (two 0.25 per cent increases to the current rate) 14.6 per cent of mortgage holders will have negative levels of household cashflow, leaving them at risk of default. A further 8.1 per cent will see the level of spare cash in their household budget decline by 60-100 per cent. 

The RBA has concluded: "This latter group of (typically low-income, highly indebted) households would likely be forced to draw down on their stocks of saving in order to continue to meet their loan payments and essential living expenses."

However, it admits that "Some may have a limited ability to do this, given that low-income and highly indebted households typically have lower savings buffers." It is highly likely that the RBA will need to work with banks and other lenders to shift these borrowers to more affordable loans and avoid defaults wherever possible. 

Rents up, vacancies down

A new report from PropTrack found that demand for rentals has intensified in the capital cities, with enquiries per listing up 31.1 per cent, while the supply of properties becoming available for rent remains historically low. New rental property listings on were down 29.2 per cent month-on-month in December, 6.6 per cent lower than they were a year earlier. 

Economics researcher Cameron Kusher, who compiled the PropTrack report, says that many people who left the Sydney and Melbourne markets during the pandemic have returned: "Now they're coming back and also a lot of people that migrate to Australia from overseas are coming into those cities and exacerbating the shortage of supply," he said.

"I think in 2023 we're going to see an ongoing slowdown and an easing of rental market conditions in regional areas of the country, but I think in the major capital cities…we're going to see rental conditions tightened even further as more people come back to those cities and rental demand escalates. And this could even carry on into 2024."

Student housing is a special area of concern. More than 40,000 Chinese students will return to Australia after the Chinese Ministry for Education announced it would no longer recognise qualifications of students who studied remotely. The Herald’s Christopher Harris says that at Sydney University Village there is a waitlist for a one-bedroom apartment that costs $903.50 per week if occupied by two people, and studio apartments on Broadway, priced at $799 per week are sold out, as are five- and six-bedroom share units.

To put it mildly, all rents became less affordable over 2022, rising nationally to a median of $519, and across Sydney to a median of $679 per week. Domain’s chief of research and economics, Nicola Powell said asking rents are at historic highs: “Rents are rising at the fastest annual pace ever seen across the combined capitals, and the number of vacant rental properties is at an all-time low for the month of December,” Dr Powell said.

Sydney’s rental vacancy rate hit an all-time low of 1.1 per cent in September 2022, improving fractionally to 1.3 per cent in December. Parts of Sydney were especially hard-hit by increasing rents - median asking rents in Zetland, Chippendale, Ultimo and Mascot jumped by 20 per cent or more during 2022, with tenants in Zetland seeing their rents shoot up 23 per cent, a rise of $140 per week. Sydney-wide, unit rents rose a record 18.6 per cent, climbing to a median of $575 per week.

Dr Powell said the early stages of the pandemic hit the inner-city apartment market hard, but this had now been more than offset by returning international students, migrants, local tenants looking for more affordable housing, and ‘treechangers’ returning to the city after periods of working from home in the regions: “The rental crisis ... hasn’t happened overnight. We have not been building enough supply and we have not built enough social housing.”

And it’s not just apartment dwellers feeling the pinch. Substantial rents hikes were also recorded for houses, but gains weren’t just in areas close to the city. Rose Bay had the biggest increase at 33.4 per cent, followed by Fairlight, Merrylands West and Brighton-Le-Sands which were all up more than 28 per cent.

Cameron Kusher said that the shortage of rental properties coupled with an increase in the number of tenants seeking a home will drive up prices, and that isn't good news for renters.

"Addressing the demand and supply dynamic will take some time, which means that supply is likely to remain tight and the cost of renting will increase," Mr Kusher explained. "Although many homes are under construction and build-to-rent is rising in prevalence as an asset class, it seems unlikely those additions to the housing stock will be enough to create an equilibrium between supply and demand.”

Housing helps the rich get richer

Calculations compiled by the Grattan Institute’s Brendan Coates and Joey Moloney show that, while average full-time earnings have doubled over the past half-century, home prices have quadrupled. This has made more Australians millionaires. In 2019-20, one-quarter of homeowning households had a net wealth exceeding $1 million, while the median net wealth for non-homeowning households was just $60,000.

CoreLogic estimates that 57 per cent of Australians’ household wealth is held in housing, and that our housing market is currently worth something like $9.3 trillion. That’s around three times bigger than our accumulated superannuation funds and it comprises 62 per cent of the balance sheets of all banks and other authorised deposit-taking institutions.

Between 2003-04 and 2019-20 the real incomes for the highest fifth of households increased by 47 per cent. After adjusting for inflation caused by the rise in housing costs the figure was still almost 43 per cent. Over the same period the inflation-adjusted incomes for the lowest fifth of households increased by about 26 per cent but more than half of this was chewed up by the rise in housing costs, with post-housing incomes climbing only 12 per cent.

Coates and Moloney concluded that since 2003-04, the wealth of high-income households has grown by more than 50 per cent, much of that due to increasing property values. By contrast, the wealth of low-income households — mostly non-homeowners — has grown by less than 10 per cent.

More calculations by economists Josh Ryan-Collins and Cameron Murray found that up until June 2019, in more than half of the previous 30 quarters, the median Sydney home earned more than the median full-time worker. To put it another way, an investment in Sydney property that was a relatively low-risk proposition generated greater returns than would be produced by a year of full-time work.

Will it always be this good for those who own property? Eiza Owen, CoreLogic’s head of research, points out that the Reserve Bank’s raising the cash rate has raised the ratio of household debt to income to a record 146 per cent, and house prices have fallen by a record-breaking 8.4 per cent nationally. 

“It’s very uncertain what the next growth cycle will look like, though we expect it will be a much more muted upswing than what we’ve seen through to 2010s and early 2020s,” Owen says.

“The last time Australia’s cash rate was over 3 per cent, national home values did experience a trough-to-peak upswing of around 16 per cent over 2009-10, but other factors such as strong overseas migration aided this, as did the dwelling market coming off a lower base and being more affordable.”

Stamp duty saga continues

Almost nobody is a fan of stamp duty, especially those that have to pay it on the purchase of a property. It’s a bad tax because it taxes homeowners every time they move, whether it’s for a better job or to downsize or upsize due to lifestyle changes. It hits couples divorcing when each partner acquires a new residence, and it’s especially hard on younger households that are more likely to move around, unlike older residents who tend to stay at the same address for much longer periods.

The only positive side of stamp duty is that it enables states and territories to raise significant amounts of money without which they’d be unable to provide their residents with essential services, like hospitals and schools unless a replacement source of funds can be found. NSW Treasury took in $14.5 billion in FY 2021-22, for example. The latest NSW half-yearly budget forecasts a $1.7 billion downturn this year because of falls in the number of sales and lower house prices.

Now on the table as an alternative source of funds is a broad-based land tax on all property, levied every year on all owners of land and based on an assessed value that could be varied as the need for funds increased.

The NSW Coalition government has already legislated to give first home buyers the option of paying an annual land tax rather than stamp duty if they buy a property worth up to $1.5m. The Herald’s Michael Janda says the government’s plan could mean savings for first-home buyers: “Relatively few first home buyers end up living in their property for more than a decade, and 10 years of land tax on a million-dollar home where half the value is the land will likely be a tad over $22,000, or close to half the cost of stamp duty.

“If that million-dollar home was an apartment, the savings would be much bigger still because, unlike stamp duty, the land tax is levied only on the land value, not including anything built on it. With apartments, the land value is split among many individual units,” said Mr Janda.

However, levying such a ‘forever tax’ like land tax on residents – voters most especially, would be a red rag to a bull at any forthcoming election that could see a government bold enough to do this tossed out on its ear. When NSW Premier Perrottet announced his plan to remove stamp duty on housing purchases by first-home buyers if they opted to pay an annual land tax he was tempting fate.

But now the Labor party’s Chris Minns has just announced a similar proposal that will also exempt first-home buyers from the onerous stamp duty if they are purchasing properties valued at up to $800,000 and give a stamp duty discount for more expensive properties worth up to $1 million, but with no obligation for a land tax tradeoff.

As Mr Minns said when announcing his new plan: “I understand the stress of trying to purchase your first home. I want more singles, couples and families realising this dream. What I will not do is saddle first home buyers with a new, yearly tax bill that increases every year.” So, now it’s game on for these political opponents, Perrottet and Minns, to put their ‘toes in the water’ in front of voters and see how the public responds at the March election. 

As to which option will be the more appealing to the targeted first-home buyers, Angus Moore from tells us: “The short answer is some first-time buyers – something like a quarter – will be better off (under the Labor plan) but many – as much as 30 per cent – will end up worse off. The longer answer is that it depends on how expensive the home you buy is, and how long you want to stay in it.”

The Herald’s Jessica Irvine adds some additional details: “As a rough rule of thumb, the Coalition’s land tax regime is best suited to unit buyers and those who intend to upgrade their properties within a decade or so. For those who intend to buy a freestanding home or live in their home for a long period of time, the land tax regime becomes less attractive (although not worse in every case).”


‘Fixed-rate mortgages will tip over a $16,500 cliff,’ Shane Wright, Sydney Morning Herald, 14 February 2023
‘NSW half-yearly budget predicts $1.7 billion downturn in stamp duty revenue this year,’ Ashleigh Raper, ABC News online, 8 February 2023
‘Banks won’t let people fall off mortgage cliff: Bligh,’ Angus Thompson, Sydney Morning Herald, 8 February 2023
‘After a tough year, there are growing signs Australia's construction sector is on the road to recovery,’ Brett Thomas,, 8 February 2023
‘What experts think of the RBA’s interest rate rises – and what they say is coming next,’ Peter Hannam, The Guardian, 10 February 2023
‘Why it makes sense to upsize in a downturn,’ Daniel Butkovich, Domain, 6 February 2023 ‘Property prices are falling. Don't freak out, or get excited,’ Daniel Ziffer, ABC News online, 1 February 2023
‘It’s the deepest property downturn ever, but how long will it last?,’ Jim Malo, Domain, 6 February 2023
‘Reserve Bank expecting up to 800,000 fixed home loan contracts will end this year,’ Stephanie Borys, ABC News online, 2 February 2023
‘Pretty bleak for tenants’: Rental vacancy rate at record low,’ Jim Malo and Tawar Razaghi, Domain, 3 February 2023
‘What to expect from the February 2023 RBA meeting,’ Mark Bristow, Rate City, 4 February 2023
‘Supreme Court judge predicts property repossessions to increase significantly as interest rates rise,’ Alex Turner-Cohen,, 5 February 2023
‘Australia's property downturn is slowing – are prices still falling where you live?.’ Ellen Lutton, Domain, 25 January 2023
‘Rental crisis fears for international students as they return to Sydney,’ Christopher Harris,  The Sydney Morning Herald, 30 January 2023
‘Living in mortgage hell’: tens of thousands of borrowers on the brink,’ Jessica Irvine, Sydney Morning Herald, 31 January 2023
‘One fifth of mortgage holders bracing for interest rate pain,’ Courtney Gould,, 31 January 2023
‘Which Sydney homes have had the smallest – and largest – price falls?,’ Kate Burke and Melissa Heagney-Bayliss, Domain, 5 February 2023
‘Sydney house prices post steepest annual fall on record,’ Kate Burke and Melissa Heagney-Bayliss, Domain, 25 January 2023
‘Property prices falling in over half of suburbs nationwide as the downturn deepens,’ Kate Burke, Domain, 18 January 2023
‘New report reveals what's ahead for Aussie rental markets this year - and it's not pretty,’ Emily Hutchinson,, 21 January 2023
‘Australia's rental market will only get tighter in 2023. Could more property investors be the answer?,’ Emily Sakzewski, ABC News online, 21 January 2023
‘Huge mortgage change about to strike thousands of Aussie homeowners,’ Tarric Brooker,, 23 January 2023
‘‘Refinancing hits record high in November as homeowners shop around,’ Simone Fox Koob, Sydney Morning Herald, 13 January 2023
Collapse in listings puts floor under house prices,’ Leith Van Onselen, Macrobusiness, 13 January 2023
‘Australia’s $9.3 trillion housing question,’ Nila Sweeny, Australian Financial Review, 15 January 2023
‘Stamp duty could change in a big way in NSW for first-home buyers. Is that a good or a bad thing?,’ Angus Moore,, 14 January 2023
‘NSW Labor to abolish stamp duty for first home buyers,’ Alexandra Smith, Sydney Morning Herald, 9 January 2023
‘NSW Labor counters Perrottet’s land tax with vow to scrap stamp duty for some first home buyers,’ Stephanie Convery, The Guardian, 9 January 2023
‘Stamp duty is a bad tax. So why can’t Australia agree on what should replace it?,’ Joey Moloney and Brendan Coates, The Guardian, 14 January 2023
‘The Sydney suburbs where rents have soared most,’ Kate Burke, Domain, 14 January 2023
‘National rents soared by 10.2pc last year. Here’s how much rent costs in Australia’s most expensive and affordable suburbs,’ ABC News online, 14 January 2023
‘How housing made rich Australians 50 per cent richer, leaving renters and the young behind — and how to fix it,’ Brendan Coates and Joey Moloney, ABC News online, 9 January 2023