Sydney property prices down 10% from record highs

The combined value of residential real estate was estimated to be $9.5 trillion at the end of October, according to the latest information from research house Core Logic.

The latest information reveals the first year-on-year decline in national home values, led by a -3.1% annual drop in the combined capital cities market.

Here's what happened in October.

  • The combined value of residential real estate in Australia fell to $9.5 trillion at the end of October

  • Dwelling values in Australia are -0.9% lower over the past 12 months, marking the first annual decline since October 2019.

  • The housing market downswing has become more broad-based

  • The highest annual growth rate in dwelling values among the regional and capital city markets was across Regional SA, at 20.4%. The lowest rate of change in values was across Sydney, down -8.6% over the year.

  • Sales volumes are trending lower as buyer demand slows. CoreLogic estimates that in the 12 months to October, there were 551,981 sales nationally, down -9.3% compared to the previous year.

  • At the national level, properties are taking longer to sell. In the three months to October, the median days on market was 36, up from a low of 20 days over the three months to November 2021.

  • Similarly, vendor discounting has also increased from the recent low of -2.9% recorded in the three months to November last year. In the three months to October, the median vendor discount at the national level was -4.3%.

  • In the four weeks to November 6, new listings volumes trended higher. At 38,438 newly advertised properties added for sale, the new listings trend is showing a slight seasonal uplift. However, new listings volumes remain low relative to previous years.

  • The combined capital cities clearance rate steadied through October, averaging 59.5% in the four weeks ending November 6. This is down from 78.5% in the equivalent period of 2021.

  • Rental value growth remains high across Australian dwellings, but the annual growth in house rents has shown signs of moderating. Unit rent values have seen increased momentum, rising 12.4% in the past 12 months. Across all dwellings, this resulted in an annual rental growth rate of 10.0%.

  • Housing finance secured totalled $25.1 billion in September. The value of secured housing finance fell -8.2% in the month, taking new housing finance -22.4% lower than a recent peak in May.

  • The RBA increased the underlying cash rate target a further 0.25% through November. The Board reiterated further increases in the cash rate ahead, as it remains ‘resolute’ in returning inflation to target.

The Reserve Bank of Australia (RBA) took markets by surprise on October 5th when they slowed the size of rate hikes to 0.25% from the larger, more widely-expected 0.50% moves that we have seen throughout 2022. Rate hikes of 0.25% are expected to be the norm in Australia moving forward, which will provide a small degree of relief to many mortgagors. The cash rate was lifted another 25bps to 2.85% on November 2nd. Many experts are predicting a pause to rate rises in the early parts of 2023, before predicting potential rate cuts towards the end of 2023 early stages of 2024.

The RBA’s response to the inflation print was ultimately centred on its desire to manufacture a ‘soft landing’. However, it is clear that the RBA sees inflation is the bigger evil in the trade-off between inflation and low growth, as it would be costly to re-establish low inflation if upside risks to inflation materialised - meaning rates would need to remain higher for longer.

Australians surveyed prior to the RBA’s rate hike of 0.25%, recorded the second lowest consumer sentiment since the early 1990s. Interestingly, subdued sentiment has not yet translated into weaker spending. However, a slowdown in spending is inevitable as rate hikes eventually begin to bite. Until this slowdown in spending materialises, it is likely that business conditions will remain favourable alongside the strength in consumer demand.

WHAT DOES BUYERS BEING RE-RATED MEAN? AND HOW DOES BUYERS BEING RE-RATED AFFECT PROPERTY PRICES?

Australians are reacting as they start to pull their belts a little tighter, this coupled with buyers continuously being re-rated is having an effect on the property markets, as many are sitting on the sidelines with the uncertainty surrounding interest rates.

The bank re-rates customers each month based on the current interest rates. They apply an affordability test and affectively do a stress test to see how your budget/ cashflow can handle additional interest rate rises.

As we have seen over the past eight months, interest rates have increased by 2.75% which means mortgage repayments have increased. This will affect how much debt an individual or family can take on, as a larger proportion of their household income will be consumed by mortgage repayments.

Therefore, not only are we seeing a reduction on how much Australians can borrow, we are also seeing property “buying pools” reducing.

E.g. In March 2022, there were more people that could afford to borrow $1m and pay for a $1.5m home.

However, with seven consecutive interest rate hikes these people can only borrow $780,000.

This shrinks the amount of buyers a vendor (or seller of a property) has to compete for their property.

We are seeing auction clearance rates falling, time on market increasing, with less qualified buyers ensuring that some vendors are taking discounts on current listed prices.

What Next

Mortgage holders, we should some relief come through in the coming months. Possibly one maybe two more modest rate hikes (0.25% range), before we see a pause through the early to middle parts of 2023, with potential rates cuts towards the end of 2023 early parts of 2024.

If you are looking at your home loan and freaking out at where rates are heading, the end is in sight. We need to understand that we are looking at potentially another 0.25-0.50% rate increase before rates stabilise and potentially reduce towards the end of 2023/start of 2024.

For our clients who are retired and looking to retire, that are seeking fixed interest options, whether that is annuities or term deposits, the next few weeks will prove to be the greatest opportunity before interest rate cuts start to be priced into the markets (if they haven’t already with the US 10 year treasuries falling 0.25% recently). We would definitely be steering clear of any short term (3-12 months) duration during this period of time.

Source:

https://www.corelogic.com.au/news-research/news/2022/corelogic-home-value-index-six-months-of-falls-for-australias-residential-property-market

https://www.bt.com.au/professional/knowledge-centre/market-insights/perspectives/inflation-fire-burning-strongly-how-will-rba-respond.html


Matthew McCabe