Surge in population and faltering supply of new housing had held up Australia’s property market, but rising interest rates expected to cool prices
Get our morning and afternoon news emails, free app or daily news podcast
Australia’s surging property market may be set to cool as affordability pressures mount, borrowing costs rise and more stock enters the market, analysts say.
National home prices were at or near record levels at the end of October, while CBA analysis shows mortgage repayments as a share of income were currently the least affordable on record in all cities save for Brisbane and Perth.
Sign up for Guardian Australia’s free morning and afternoon email newsletters for your daily news roundup
Tim Lawless, CoreLogic’s executive research director, said the monthly gain in home values peaked in May at 1.5%. The year-to-date advance has been 7.2% and while the full-year increase may approach 10%, the market appeared to be losing momentum, with the pace of increases slowing even before this week’s Reserve Bank interest rate rise.
“We’re still expecting property prices to rise – just nowhere near as fast,” Lawless said.
Many commentators expected soaring interest rates would trigger a fall in real estate prices in 2023. However, the market turned out to be surprisingly strong in part because of a surge in population and the faltering supply of new housing.
A combination of falling affordability in most parts of Australia and a reduced ability to finance bigger purchases will also make significant price rises in 2024 unlikely.
Analysis by CBA, the nation’s biggest lender, shows mortgage repayments as a share of income were currently the least affordable on record in all cities save for Brisbane and Perth.
Sydney was the least affordable among major cities, with a median dwelling price at $1.090m, or 5.1 times the typical dual-income household of $215,000 a year. That was compared with 3.8 times in Melbourne, the second-least-affordable city, and a national average of 3.6 times.
“It is likely Sydney is approaching affordability constraints in terms of dwelling price growth,” said CBA economist Harry Ottley. “Our current dwelling price forecast for Sydney in 2024 is below that of the eight capital city index.”
Sally Tindall, research director for RateCity, said incomes had risen on average about 4.5% in the year and a half since the RBA began lifting its key interest rate. By contrast, the cost of mortgage repayments will have jumped almost 52% once the latest rate increase gets passed on.
By RateCity’s calculations, the ability to borrow to buy a dwelling was now about 30% less than when the RBA started its rate-hiking cycle.
Assuming the borrower secured the lowest advertised variable loan rate and could post a 20% deposit, this week’s rate rise will trim about $10,500 from the total a single person can borrow.
The reduction in maximum borrowing capacity has now ticked past $200,000 for a typical borrower.
Sign up to Afternoon Update
Our Australian afternoon update breaks down the key stories of the day, telling you what’s happening and why it matters
after newsletter promotion
For a family of four with one person working full-time and the other person on half pay, the average borrowing capacity has now shrunk by more than $275,000, RateCity said.
Tindall said the market still had “much pent-up demand and a distinct lack of stock”, so the extra reduction of $10,000 in borrowing capacity probably wouldn’t rattle “someone’s home-buying plans entirely”.
Still, “it should cool the property market down slightly”, she said.
CoreLogic’s Lawless said other signs of the market coming off the boil included a drop in auction clearance rates in recent weeks to about 62% across capital cities. That ratio was down from the low-70% range in the middle of 2023.
One factor was an increase in the number of properties being put up for sale. Homes were also taking longer to sell, Lawless said.
For the current week, 2,816 homes were up for auction in capital cities, about 30% more than for this time last year. This year, only the week ending 29 October had more homes going under the hammer this year.
With 90-day arrears on mortgage loans remaining about 0.6% of the total – a low proportion by historical level – there was also little sign of a rise in forced home sales.
“The safety net for the housing market is that the labour market remains extremely tight,” Lawless said.
The Reserve Bank also agreed the run-up in housing prices may be losing puff.
“A number of indicators suggest that national housing price growth may slow over coming months,” the bank said on Friday in its quarterly forecast update.
“Price growth has eased in markets that led the rebound in prices, particularly in the higher value segments of Sydney and Melbourne,” it said. “This is consistent with the rise in new listings in these areas and a decline in auction clearance rates.”