Market comment: DOWN BUT NOT OUT

Tue, 21 Mar 2023

Market comment: DOWN BUT NOT OUTSydney property looks forward to halt in interest rate rises

With Australian property prices having fallen nationwide, largely as a result of the RBA’s interest rate increases that have made it harder for borrowers to acquire funds for housing, there is naturally a mounting wave of speculation about when the price falls will stop and a cyclical upswing will get underway. Domain’s chief of economics and research Dr Nicola Powell identified some of the trends to watch for in the 2023 property market.

Dr Powell says there’s a widely held view that Australian property prices go through boom and bust phases when in fact it’s less dramatic than that, with ups and downs that indicate a healthy property market just like the expansion and contraction of an entire economy.

“In reality, what you tend to find is that prices, particularly in our big capital cities, go through substantial periods of an upswing, when we see rapid gains in property prices, and then they move into a contraction phase of the market,” she says.

“And what you tend to find is the contraction phase or when we see prices decline, it’s normally shorter and less severe than the upswing that preceded.”

Dr Powell said that the premium suburbs in Sydney with the most expensive homes are often the first to move. Price changes then flow outward, first to less expensive Sydney suburbs and then to other capital cities and regional areas in what’s known as the ripple effect. 

“In the suburbs where you see those more premium inner areas you start to see softness first, and it kind of ripples out to the outer areas and you tend to find those more affordable outer areas see less of a declining price compared to those inner premium areas.”

CoreLogic figures show that Sydney property values are still 7.7 per cent higher than they were in March 2020, so although the current contraction seems pretty severe it still hasn’t taken away all the gains of the past three years. However, analysts are in general agreement that there’s further falls to come before the market stabilises.

As we look forward to an end to falling house prices, we see Sydney home sellers discounting their properties by the largest amount in years. The average discount for Sydney houses has increased every month since its low of 4.9 per cent in the three months to July 2021.

New data from Domain shows that Sydney houses were discounted by an average of 7.9 per cent in the three months to January this year, the largest discount since the three months to July 2019, when the property market was emerging from its last downturn.

Sydney units were discounted by an average of 7 per cent, the largest price drop since the three months to September 2019. (The average is for properties sold via private treaty, and is based on the difference between the advertised price and the sale price.)

Dr Powell said the increase in the level of discounting pointed to a still declining market: 
“[Discounting levels] have gone back to the previous downturn. When discounting is rising it means overall prices are falling. Historically, you do tend to find that higher priced areas see greater rates of discounting,” she said.

The largest discount was in the eastern suburbs, where houses sold for an average of 11.8 per cent below their advertised price, up from 5 per cent the previous year. That would equate to an almost $370,000 discount for a house first advertised at the region’s median house price of $3.13 million.

Clearances high

The Sydney auction market has shown some strength with a steady clearance rate above 60 per cent most weeks – in fact, the rate for the month of February was 69 per cent. Interestingly, there’s a general belief that a clearance rate of 60 per cent reflects stable house prices while a clearance rate of 70 per cent indicates rising prices. 

Domain chief of research and economics Dr Nicola Powell expressed caution on expecting too much from the recent high clearance rates: “Clearance rates are pretty high, but one of the reasons for this is the seasonal impact. 

“We always see a bounce in the new calendar year … no matter what’s happening in the market, buyers will come back because they missed out at the end of the year before,” she said, adding that the number of homes for sale at auctions was low and many home sellers were waiting out the downturn before listing their properties.

Another caution was issued by AMP Capital’s Dr Shane Oliver who said he expects further price falls: “Over the next few months, the clearance [rate] will start to head back down again … by the June quarter we will start to see renewed weakness in clearance rates and the same in property price data,” Oliver told Domain.

“People can’t borrow as much as they once could, and there is this risk if rates keep going up that we will end up with more distressed selling.”

On a more positive note, real estate veteran John McGrath says the housing price slump is nearing its end: “If you went to any of our auctions or opens on the weekend you would have seen there is no problem with this market,” said McGrath.

“There is a shortage of stock ... which means people feel we are getting closer to the top of the interest rate cycle, and they are factoring in one or two more rises, they are doing their sums on that and buying because they are getting a discount to what they would have paid 18 months ago.”

Mr McGrath based his predictions on historical evidence that cycles in “downward legs” last for about 18 months: “We’ve been in this [cycle] now for 15 to 16 months and I think, on average, they last six to seven downward legs and have historically been down 8 to 9 per cent,” he said.

He told the Herald’s Carolyn Cummins that selling prices in most markets have corrected by between 10 per cent and 15 per cent from their peak in late 2021 and volumes were at least 20 per cent lower in the spring selling season, compared with the corresponding spring in 2021.

“So looking at historical data it would suggest we should be at, or near, the end of the downward cycle, and if you look at what’s happening in the street at the moment, there is plenty of demand,” he said.

That stock shortage referenced by John McGrath is reflected in the dramatic decline in new home listings on the Sydney market, outpacing even the scale of declines during the pandemic lockdowns. Domain’s figures show that the declines during the December quarter even eclipsed pullbacks recorded during the banking royal commission during 2018, roughly double the market average. 

CoreLogic figures also show the decline in the number of new listings, down 22 per cent on the five-year average, while in 2022 Sydney prices for houses and apartments were down 12.1 per cent – more than double the 5.3 per cent national average drop.

The chief executive of the Domain Group, Jason Pellegrino, said he was confident that demand would return: “It’s only a matter of time for confidence to recover and support the inevitable bounce back in market listings.”

Interest rate peak?

The RBA’s tenth consecutive interest rate rise in March lifted the cash rate by 25 basis points to 3.6 per cent – the highest cash rate since June 2012. Analysts from the big four banks had earlier forecast the cash rate to reach its peak somewhere between 3.85 per cent and 4.1 per cent, probably by May this year. 

PropTrack Senior Economist Eleanor Creagh told’s Jessica Wang that she believed interest rates were now ‘closer to the peak’: “If the Reserve Bank hits pause on its tightening cycle later this year, home prices will likely begin to stabilise as some of the uncertainty buyers have experienced with respect to borrowing capacities and mortgage servicing costs reduces,” she said.

Asia-Pacific economist with jobs website Indeed, Callam Pickering, said the RBA had little option to more rate increases: “As painful as higher mortgage rates might be, a persistent period of high inflation will inevitably be more dangerous for jobs and incomes and the overall Australian economy,” he said.

“The market anticipates that the cash rate will peak at around 4.1 per cent this year – implying an additional two 25 basis point hikes. For that to occur, we’d need to see inflation show meaningful signs of improvement in April and then July – the next two quarterly inflation releases – along with some softer results from the monthly inflation measure.”

The ABC’s Peter Martin did have some hopeful news from the details in the RBA’s March statement that could indicate an end to the rate rises as early as mid-September this year: “The best guide to what the Reserve Bank has in mind is usually the first few words of the final paragraph of its statement.

“Last time, in February, those words referred to further interest rate "increases", making it clear the bank expected more than one. This time, there's no plural. The sentence refers merely to ‘further tightening’, which could mean as little as one more increase, and not necessarily next month”, he said.

He also noted that RBA Governor Philip Lowe’s term expires on September 17 and that he would no doubt like to hand over the Bank in good order to his successor. Tying up loose ends, like the conclusion of interest rate rises, might well be an element of his plans.

Lower affordability

Moody’s Investors Services analyst Si Chen says that housing affordability is expected to remain poor over 2023, and Sydney’s shown itself to be the least affordable city in Australia:  "In February, new home loan borrowers needed an average 30.9 per cent of monthly income to meet monthly mortgage repayments, up from 26.4 per cent in May 2022 [when interest rates began to increase]”.

In a nutshell, wages increased 2.7 per cent between March 2022 and  December 2022 while monthly mortgage repayments increased 42.2 per cent over the same period. This has meant a rise of $1051 in monthly repayments on a $500,000 mortgage according to Canstar editor-at-large Effie Zahos: “When it comes to rate hikes, wages are not keeping up. It doesn’t put homeowners in a good position when you look at the proportion of their income required to service a debt.”

Zahos said the rate hikes were also bad news for those hoping to buy a property, noting that a single income earner on the average net wage of $71,000 could no longer afford a $500,000 loan: 
“They would be paying 52 per cent of their income to service that loan,” she said.

More figures from Moody’s Investor Services showed that an average Australian household with two income earners would need to put 30.9 per cent of their income towards repayments on new home loans in February, up from 26.4 per cent in May last year.

ABC News’ Peter Martin did his own calculations that showed a borrower with a $600,000 variable mortgage has needed to find an extra $1,080 to their monthly repayments since the RBA’s interest rate rises began earlier this year. 

Alison Pennington from the ABC’s ‘The Conversation’ says that over 60 per cent of people aged under 30 are now renting, and renting permanently is the reality for a growing number of low-income people: “After momentarily cooling with reduced demand in the pandemic lull, and various short-term measures introduced by state governments to relieve renters — including moratoriums on evictions and prohibitions on rent increases — rental prices have since surged. 

“In the 12 months to September 2022, rental prices grew nationally by 15 per cent, and vacancy rates fell to their lowest level since 2006 at less than 1 per cent, with ongoing floods in New South Wales and Victoria placing greater strain on already-slim housing stocks in regional areas.”

Fixed-rate cliff

An estimated 800,000 homeowners with fixed-rate mortgages averaging $600,000 face a massive repayment cliff according to KPMG, as people who took advantage of record-low fixed interest rates in 2020 and 2021 will this year take a financial hit when they refinance and their repayments rise by an estimated $16,500 over a twelve-month period.

KPMG Australia chief economist Brendan Rynne said the RBA’s tightening of monetary policy was now working on a “two-stage” basis, as variable-rate mortgage holders were about to be joined by those with fixed-rate loans.

“The first stage gradually hitting variable mortgage holders, as the cash rate increases are passed on (relatively quickly) by their banks, and the second stage hitting fixed-rate mortgage holders in a shock-fashion as they move from their very low fixed rate to the current market variable rate,” he said.

AMP Capital chief economist Shane Oliver expressed the concerns of many in the Australian finance sector when he said he was increasingly concerned the RBA was lifting interest rates too far and not paying enough attention to the lagged way in which higher rates were affecting the economy.

“This is increasing the risk of a recession that we don’t have to have and with that, a bigger rise in unemployment and a bigger fall in home prices,” Oliver said.

Dr Oliver told the ABC he estimates about 1 million households, about a third of the 3.3 million with a mortgage, will need to make significant spending cuts to keep up with minimum repayments.

"That's a high number — that's 10 per cent of Australian households that are actually quite vulnerable; that impacts everything, whether it's retailers, service providers, tourist operators, and so on, will see less demand over the course of the next 12 months."

"We've seen several more interest rate hikes since [October], the Reserve Bank is flagging more to come, and so you'd have to say that that risk has gone up from whatever the Reserve Bank was assessing it to be back in October last year," Dr Oliver said.

Build-to-Rent news

In 2018 we covered developments in a relatively new area of the Sydney housing market – the Build-to-Rent (BTR) sector. At that time, Mirvac was interested in getting this type of housing underway as a serious option for renters but was having some problems negotiating taxation matters with the federal government.

Build-to-rent is seen as a means of overcoming many housing unaffordability issues. It is often called multi-family housing in overseas markets and enables developers to build rental properties for which they retain ownership and get a return on their investments from long-term rentals.

Tenants have greater security of tenure in these properties without the possibility of their dwellings being ‘flipped’ or sold to new owners as is often the case with rental apartments. The developers become landlords and benefit from more stable tenancies and fewer vacancies than owners usually experience.

Mirvac’s chief executive Susan Lloyd-Hurwitz said in 2018 that renting has become a lifestyle choice for a much wider group of people who want to be closer to work and other lifestyle services and amenity: "We believe build-to-rent can provide renters with better choice, better quality and better security of tenure,” she said. 

In 2020, writing in the Sydney Morning Herald, Rob Stokes said build-to-rent produces a number of benefits: “Developers can ignore the short-term bumps in property prices and build a constant supply of homes – regulating housing supply and affordability and generating a more sustainable construction industry. 

“Investors looking for a stable yield will now have a residential product in which to invest. Renters can rely on greater security with longer tenancies so that a rental property can become a long-term home. And developers have an incentive to ensure high-building quality, since they will retain ownership for decades,” he concluded.

In 2023 build-to-rent developments are now being seen as attractive options for retirees as well as for those seeking affordable housing. Writing in the Herald, Rachel Lane says it’s the latest housing trend for retirees and should be considered for those who want to downsize: “Build-to-rent developments offer many of the amenities that you would find in a retirement village such as dog parks, BBQ areas, communal gardens, swimming pools, cinemas and gyms. 

“The fact that the entire development is owned and managed by the developer means that you can have greater flexibility through longer lease terms, lower or no bond, permission to have pets and decorate the home, and the ability to move between homes when your circumstances change.” 

Rachel Lane, who is author of ‘Downsizing Made Simple’, says that across the eastern states governments are now providing incentives so that some or all of the homes in a build-to-rent development can be provided at lower cost.

“However, that doesn’t mean they are all cheap. In some developments, the rent is higher than the private rental market because the development has numerous amenities or services,” she says.

Build-to-rent housing was incorporated into the NSW planning system in February 2021. Eligible Build-to-Rent properties receive a 50 per cent reduction in land value for land tax purposes. BTR developments will also receive an exemption from foreign investor duty and land tax surcharges (or a refund of surcharges paid).

Build-to-Rent hasn’t yet received a lot of media attention but the benefits it offers tenants and the opportunities for investors make it likely that it will be a growth element in our housing mix. We’ll continue to monitor developments in BTR and report them to you.


‘Property prices higher since COVID-19 start, but experts unsure what looms,’ Elizabeth Redman, Domain, 14 March 2023 
‘Real estate veteran predicts bottom is nearing for house price falls,’ Carolyn Cummins, Sydney Morning Herald, 20 February 2023
‘Fall in house prices stalls but reprieve may be short-lived,’ Rachel Clun and Shane Wright, Sydney Morning Herald, 1 March 2023
‘Where Sydney home sellers are dropping price expectations most,’ Tawar Razaghi and Kate Burke, Domain, 25 February 2023 
‘Is the auction market causing a false dawn for property prices?,’ Melissa Heagney-Bayliss and Elizabeth Redman, Domain, 7 March 2023
‘RBA lifts rates to 11-year high of 3.6 per cent,’ Shane Wright, The Sydney Morning Herald, 7 March 2023
‘RBA interest rates: Cash rate hits 3.6 per cent in 10th consecutive rate rise,’ Jessica Wang,, 8 March 2023
‘Why RBA interest rate hikes could end by September – but brace for at least one more,’ Peter Martin, ABC News online, 8 March 2023
‘Household budgets squeezed as increased mortgage costs soar above wages growth,’ Jim Malo, Sydney Morning Herald, 9 March 2023
‘The cost-of-living crisis has roots in property but whether you rent or pay a mortgage, there's a dark tunnel ahead,’ David Taylor, ABC News, 11 March 2023
‘Million households 'vulnerable' to rising interest rates, and their cuts could cause recession,’ Stephanie Chalmers, ABC News online, 17 February 2023
‘Collapse in new home listings in Sydney and Melbourne hits real estate company profits,’ Jonathan Barrett, The Guardian, 16 February 2023
‘How the property cycle works and how to use it to your advantage,’ Kate Farrelly, Domain, 16 February 2023
‘Fixed-rate mortgages will tip over a $16,500 cliff,’ Shane Wright, Sydney Morning Herald, 14 February 2023
‘Why the RBA is firing all the wrong ammunition in all the wrong places,’ Ian Verrender, ABC News online, 7 March 2023
‘Albanese government to introduce $10b housing fund to target homelessness,’ Ellen Ransley,, 9 February 2023
‘Housing policies favour the rich and leave first home buyers out of the market. How did it come to this?,’ Alison Pennington, The Conversation, ABC News, 7 March 2023