Australian housing market – $10 trillion and declining

When the Covid-19 pandemic started in March 2020, most people did not expect it to trigger a boom in Australian house prices. It is certainly not what the banks predicted at the time.

But there has been a boom. At the beginning of this year, house prices were 25% higher than when the pandemic hit. The total value of the housing stock hit AU$10 trillion

There are plenty of explanations – Australians off the coast suddenly recognized the advantage of living in the happy land and so bought a piece of it; Australians on land could not spend their money on travel so invested in real estate and for many ‘working from home’ brought a new perspective on housing.

The main reason, of course, was that in response to the pandemic, the Reserve Bank of Australia (RBA) quickly cut its spot interest rate from 0.75% to just 0.10%. Significantly, the bank said it didn’t expect to start raising rates until 2024. Mortgage rates hit an all-time low and the housing market soared.

But as with all booms, this had to come to an end. And again, it’s the RBA that drives the action. Successive interest rate hikes followed in May and June, first 0.25% and then 0.50%. It was the first increases since 2010.

In a speech on Tuesday, RBA Governor Philip Lowe . said said that the bank is “committed to doing whatever it takes to ensure inflation returns to its target range of 2 to 3 percent.” Since the most recent inflation rate was 5.1% and the RBA expects it to peak at 7% in December, more rate hikes are a certainty.

Financial markets expect another hike of 0.50% next month and a spot rate of 2.75% or more by the end of the year.

The upward trajectory of house prices started to look fragile at the start of the year as it became clear that interest rates would inevitably rise. According to data from Corelogic, in February Sydney was the first market to start declining. It was soon followed by Melbourne and then Canberra. Some locations are still rising, but in most places the momentum is waning.

Overall, Corelogic’s National Home Value Index turned down in May, the first drop in nearly two years. It was only 0.1%, but more and steeper declines are now expected.

All the telltale signs of trouble in the housing market are showing up in the hardest-hit capitals. Sales volumes are falling and houses are taking longer to sell. Clearance rates for auctions are steadily declining. According to Corelogic, last week… clearing speed: of just 54.8% was the lowest since July 2020.

Mortgages are also declining. The latest figures from the Australian Bureau of Statistics show that new housing loan pledges fell by 6.4% in April.

The buyer/seller dynamic has changed dramatically in just a few months. In many locations, buyers who were desperate for a rising market have been replaced by buyers who were careful about paying too much.

Much has been made of the plight of first-time homebuyers during the housing boom. Home prices rose much faster than many could save for a down payment. So the first home buyers looking now will at least benefit from the current downturn? Maybe not. According to Moody’s Investors Service, the fall in house prices will not outweigh the rise in mortgage rates, which means that the affordability of homes will not improve this year.

Of course, the big losers are likely to be those who bought in the past 12 months, especially when exposed to market interest rates. That exposure will occur when the initial fixed interest periods expire and floating interest rates kick in. This is ominous referred to as the ‘fixed rate mortgage cliff’.

According to RateCity, about 38% of home loans currently have a fixed interest rate. More than $100 billion of this will move to variable interest rates in the second half of 2023. The increase will be significant.

For many recent buyers, the dream of owning a home will turn into the nightmare of negative equity.

How bad can it get?

There are plenty of predictions and as the months go by, many become more and more pessimistic.

In May, ANZ Bank forecast a nationwide decline of 3% in 2022 and 8% in 2023. A month later, the bank revised that to 5% this year and 10% next year. In Sydney, a total decline of 20% is forecast by the end of next year.

CBA, Australia’s largest bank, also expects a 15% decline nationally by the end of 2023.

National Australian Bank expected “Prices will fall by about 15-20% as mortgage rates rise and affordability constraints become more and more compelling.”

Investment bank Jardens is also putting its money on a 15-20% drop nationally. However, chief economist Carlos Cacho is reported as: proverb that “waterfalls in Sydney and Melbourne are likely to be bigger and faster”.

Greater than 20%. That can get ugly.

Is there good news for house prices?

Unemployment is low and it looks like it will stay that way, given the chronic labor shortage that plagues many parts of the economy. That also means that wages will go up.

Now that national borders are open again, immigrants and students are returning en masse. This should stimulate the demand for housing. Indeed, the rental market boomed earlier this year as Covid restrictions eased. Rents continue to rise. Corelogic’s rent index rose 1% in May and 3% for the quarter. Corelogic says that “the annual change in rents now follows 8.8% in the combined capitals and 10.8% in the combined regions”.

State and federal governments continue to do what they always do in the housing market: drive demand. This is done by providing incentives to first home buyers in the form of cash subsidies, stamp duties, deposit support schemes and shared equity schemes.

The new Labor government included a shared share capital scheme in its bundle of election promises. Just this week, the state government of New South Wales announced one to help single parents, older singles, teachers, nurses and police buy a first home. It allows a qualifying participant to buy a home with a down payment of just 2%.

The government is incentivising financially struggling people to enter a housing market that is expected to fall by 15-20%. What could go wrong?


Ross Stitt is a freelance writer and tax attorney with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our ‘Understanding Australia‘ series.

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