Interest rate rises lead to dwelling values falling for third month in a row with Sydney prices down 5.2% since January
Australia’s property prices are falling at rates comparable to the onset of the global financial crisis or the 1980s downturn as higher interest rates deflate demand. Sydney’s drop, though, is already more precipitous than those earlier eras.
In July alone, dwelling values fell 1.3% on average nationally, marking a third consecutive monthly decline according to CoreLogic, a property data firm. Five of the nation’s eight capitals reported falls, with Sydney down 2.2% and Melbourne retreating 1.5% while prices in Brisbane, Canberra and Hobart were also starting to slide.
“We’re definitely seeing housing prices falling quite rapidly at the national level, on par with the GFC,” said Tim Lawless, CoreLogic’s research director.
For Sydney, though, values are down 5.2% from January’s peak, or deeper than the 3.9% drop at the start of the GFC in 2008. “Even going back to the early 1980s, it wasn’t going down as rapidly as this,” he said.
Commercial lending rates have been increasing for almost a year as the economy began to emerge from its Covid-induced funk. The Reserve Bank, which began lifting its cash rate in May from a record low 0.1%, is widely expected to hike again on Tuesday to mark its fastest pace of increases since 1994.
Ahead of the expected RBA rate rise on Tuesday, investors estimate there's a two-in-three chance the cash rate will jump from 1.35% now to 2%. On their projections, the cash rate has almost 2 percentage points to go before it peak about next (southern) autumn.
The reversal of property values likely has a long way to go, with a halt in the rate rises – and perhaps even cuts – next year likely to put a floor in the market, Lawless said.
Still, the relative changes will likely vary widely. Melbourne, for instance, had a milder upswing than other capitals, with prices up 17.3% from the Covid trough to the peak. By contrast, Sydney’s jump was 27.7% and Brisbane’s 42.7%, he said.
“Even just a 10% decline [in Melbourne] takes us back to levels roughly the same as July 2017,” Lawless said. “So it’s quite a different scenario from city to city.”
One additional drag on the market could come when many of those who took out fixed-rate loans when rates were low have to refinance. These peaked at almost half of new mortgages in July and August 2021, with borrowers facing much higher repayment rates when they refinance after two years or so.
“That will definitely test the market,” Lawless said. Still, provided incomes keep rising and the jobless rate remains low, these borrowers should have a “safety net”.
Regional property price gains are now ebbing too, with prices dropping 0.8% in July for the first monthly fall since August 2020. Still, these have further to fall, having risen 41.1% from the Covid trough to the peak – compared with 25.5% in the capital cities – in part because of the exodus of people to the regions.
“The stronger growth reflects a significant demographic shift towards commutable regional markets, which is likely to have some permanency as more workers take advantage of formalised hybrid employment arrangements,” Lawless said.
Renters, though, are unlikely to see much benefit from the sagging property prices.
In July alone rents rose on average 0.9% to be up almost 10% on a year ago. “Rental markets are extremely tight, with vacancy rates around 1% or lower across many parts of Australia,” Lawless said. “The number of rental listings available nationally has dropped by a third compared to the five-year average, with no signs of a lift in rental supply.”
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The return of overseas students and migrants should add to rental demand in the short term, particularly in Melbourne and Sydney, he said.
While the real estate market has shifted to favour buyers, there is not yet a rush by vendors to sell. CoreLogic said: “Although new listings are higher than at the same time last year and previous five-year average, the flow of freshly advertised stock has fallen 21.4% from the mid-March peak, helping to keep overall inventory levels low.”
During the past week, auction activity rose for the third week in a row, with 1,909 homes taken to auction across the combined capitals. That tally was up 5.4% on the previous week and 8.4% on a year earlier, CoreLogic said.
The preliminary success rate was 58.8%, up 2.8 percentage points from the previous week’s initial reading. The clearance rate on that earlier week settled at 51.9%, or the lowest final rate since early May 2020.