With the old adage, what goes up must come down, we saw that with Australian housing market in 2022, but what for next year?
During the pandemic, house values across Australia increased some 28% driven largely by record low interest rates, a shortage of housing supply and pent-up demand supported by better than expected employment conditions and fiscal stimulus.
These gains were led by houses in the major cities and in what could be described as “lifestyle” regional areas, such as Byron and Noosa.
However, rising inflationary pressures caused by higher commodity prices as a flow on effect from the war in Ukraine, supply issues associated with covid lockdowns in China and higher food prices because of the flooding in regional Australia, we have seen an aggressive approach by the RBA to lift interest rates to bring inflation back to within its targeted range of 2-3%.
What represents the quickest tightening of monetary policy in its history, the RBA has lifted the official cash rate by 275 basis points in 6 months to a 9 year high of 2.85% in November.
As interest rates rise, so does the cost to meet loan repayments and ability to borrow reduces. This in turn makes borrowers more cautious and decreases the demand for housing finance. According to the Australian Bureau of Statistics, new home loan commitments fell 8.2% in September, following a fall of 3.4% in August. This represents a 18.5% yearly percentage decline. However, new lending commitments remains higher than the pre-pandemic level seen in February 2020.
According to Corelogic, average home prices have dropped 7% since the peak in April last year.
Although Sydney’s housing values were already falling when the interest rate hike cycle began, the pace of decline accelerated sharply following the first rise in May. Home values in Sydney have decreased 11% from their peak in January 2022 but still remains some 10% higher.
Sydney being the most expensive city in Australia, has led the capitals in the current downturn. Melbourne home values have decreased by 7% peak whilst Brisbane dropped 8%, Hobart 7.6% and Canberra 6.5%. Adelaide, Perth and Darwin have fallen less than 1% since their August peaks.
The largest falls have been experienced in the areas with the largest increases, namely the more expensive suburbs in the cities and in the “lifestyle” regional areas.
Outlook
Despite a slump in average house prices since last year, they are still well above pre-pandemic levels. Whilst the trend remains negative, the rate of deceleration has been moderating since August.
However, the housing market does face some significant head winds from continued interest rate rises. With inflation expected to remain stubbornly high, we will see the RBA to continue to pursue monetary tightening. The big 4 Banks expect the cash rate to peak somewhere between 3.10% (CBA) to 3.85% (ANZ/WBC) in March 2023. before dropping by 50bps by mid-2024.
Higher interest rates along with cost of living pressures along and weaker consumer sentiment are all expected to contribute to lower property prices.
A recent Reuter poll predicts a peak to trough slump of 16%, more than the double the correction during the 2008 financial crises. However, should this occur, it should be seen as an orderly reduction on the extraordinary pandemic increase and will still see the average mean price above pre-pandemic levels.
Despite the gloomy forecasts, the fundamentals for property are still solid. New home buyers have been more active being attracted by lower prices and government incentives. Population growth driven by immigration will be a driver for demand for rental and owner-occupied housing.
Current high rental demand, particularly for units, is also attracting investors. With higher building costs, demand will be for “complete” homes rather new builds or in need of major renovation.
As employment conditions are expected to remain good and the economy will likely avoid a recession, existing property owners thinking of selling may hold out and defer listing their properties, thereby limiting supply.
You will also see more competitive activity from the Banks as they will offer cash rebates for refinancing along with tiered pricing favoring loans where owners have good equity. This will be more evident as loans fixed during the pandemic expire throughout the year.
Whilst average property prices will fall in 2023, it would be too difficult to forecast by how much and for how long. Property is always a long-term play, and whether you are considering buying or selling, the right time to do so is when it meets your goals and suits your finances.