“The pace of the decline is much worse than what we saw during the previous downturn. Affordability is more stretched, household debt is higher, and then this double factor of inflation and rising interest rates is more difficult,” said Tim Lawless, Asia-Pacific research director at CoreLogic.
This means that the key factor in determining when house prices will rise again is interest rates, and when the RBA will begin a cycle to lower them again.
“If we see interest rates leveling off, which will probably be sometime in the middle of next year, if not sooner, that’s probably a sign that housing markets are starting to stabilize,” Lawless said.
Two signs that we may be approaching the culmination of the interest rate cycle are that inflation is beginning to fall back toward its target range of 2-3 percent, and that the tight labor market begins to relax.
Do downturns (and upswings) follow certain patterns?
Yes, there are certain characteristics common to real estate cycles in Australia.
First, when it comes to the capitals, you see Sydney and Melbourne leading the cycle and smaller cities like Brisbane and Adelaide following. Although there are exceptions.
“For example, Perth is quite disconnected and much more driven by the resource cycle and large infrastructure projects, and the same is true for Darwin. And then there are the regional markets that are, for example, more agricultural and more separated from the broader trends,” adds Lawless.
Domain’s head of research and economics, Nicola Powell, says Sydney and Melbourne tend to absorb greater price volatility compared to other capitals, as homeowners are more sensitive to changes in economic conditions.
“In general, incomes are higher, households have more debt and there is proportionally more investment activity…so you tend to see bigger swings both in price increases in an upturn, but they are also more vulnerable in a downturn.” says dr. says Powell.
What if you zoom in on city level?
In a similar vein, upmarket suburbs and regions within a city are often the first to show signs of a downturn or upswing before it spreads elsewhere.
Sydney’s Eastern Suburbs peaked in house prices in June 2021, so the Eastern Suburbs have already recorded three quarters of house price declines.
At the lower end of the market, in regions such as Blacktown, Central Coast and southwestern Sydney, house prices are still rising.
So if you’re trying to hit the bottom of the cycle, keep a close eye on the more expensive areas, Dr. Powell says.
“As we get into a recovery phase, we’re probably going to pick that up first in the upper part, and the eastern suburbs are one of those areas,” she adds.
How long do real estate declines usually last?
A recent analysis by Domain observing the duration of market cycles in Sydney found that the downturn usually lasted less than half the time (in months) than the previous uptick.
“The downturn is shorter and less severe than generally seen during the upswing,” said Dr. powell.
For example, between 2000 and 2004, the real estate boom lasted 42 months to reach its peak, while during the downturn that followed, it took only 18 months for prices to fall from the peak to the next trough.
Mr. Lawless points out that during each downward phase, annual home value gains in the 12 months prior to the market peak are equal to or greater than the entire dip from peak to trough that follows.
“During a two-year period prior to each market peak, capital gains were always more significant than the subsequent dip from peak to depth,” he adds.
Is it possible to pick the bottom of the market?
Mr Lawless says people should make their decision to buy a home based on their own circumstances and budget.
“The reality is that it’s impossible to pick the top and bottom of the market,” he says.
Still, there are a number of key indicators – a combination of macroeconomic and housing market factors – that the market is on the cusp of a turnaround.
How consumer confidence is tracked (as captured in a weekly ANZ-Roy Morgan survey and a monthly Westpac-Melbourne Institute survey) provides a timely and “near perfect” correlation with the housing market.
Any improvement in consumer mindsets (a person’s willingness to buy an important household item, or their outlook on family finances for the next 12 months) gives you an indication that things are looking better for the real estate market as well.
“The correlation isn’t perfect, but it’s close to perfect,” says Mr. Lawless.
“It really goes to show that the more pessimistic consumers are about their own balance sheets, about interest rates, about their job prospects, the more it negatively impacts housing demand.”
Property indicators include number of listings, average property sales time, and sellers’ discount rate.
The number of attendees, as well as the number of bidders, at the auction, as well as clearance rates (the percentage of properties sold at auction over a given weekend) provide a good barometer of the market, Dr. Powell to it.
“Sixty percent is considered the benchmark for clearance rates, so if they’re lower than that, that normally shows that the market is correcting and we’re going to see prices fall – and of course the reverse, because if you get about 60 percent. “
Sydney’s Auction Rate last week fell to 49.9 percent, the first time it fell below 50 percent since mid-April 2020.
Is it better to sell first or buy in a recession?
There’s no one-size-fits-all answer to this, but because the top end of the market tends to lead the downturn, it could create a “sweet spot in timing” for a particular buyer segment—the upgrader—says Dr. powell.
If you are buying in a market where prices fall first, you would ideally sell your (smaller, less valuable) home while prices are still firm, then buy in the higher end market once prices have continued to fall.
Of course, that scenario doesn’t take into account how difficult it can be to find a new home, and once you’ve sold, you could be let down.
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