The significant rise in Australian property prices in 2020 and 2021 is no secret to anybody who has tried to sell or buy a home in the last few years. However, real estate values have been declining recently, and in certain cities, the decline has been significant.
Two of the most pressing concerns for investors are how far the market will drop and whether the real estate market will also collapse.
According to Eliza Owen, Head of Research, Australia at CoreLogic, “Australia’s housing market had a recent high in April 2022; at that time, the market had grown by around 30%.” Between late 2020 and early 2022, values climbed by almost 40% in rural Australia and increased by around 25% in the combined major cities.
She claims that the low-interest emergency rates instituted during the Covid-19 epidemic, which drastically reduced the cost of borrowing, had a significant role in fueling the boom, together with the subsequent rapid recovery, high demand, low unemployment, and high levels of accumulated savings.
According to Maree Kilroy, Senior Economist at BIS Oxford Economics, some preference shifts during the pandemic bolstered the housing market. These shifts included increased demand for vacation homes, tree changers moving to regional areas, the return of ex-pats, and people wanting more space or their own space following lockdowns.
So, will there be a crash in the real estate market?
CoreLogic data shows that home values throughout Australia’s big cities have declined by 6.5% from their high earlier this year. Prices in Melbourne have fallen by 6.4% since February, while in Sydney, they have fallen by 10.2%. This follows increases of 27.7% in January and 17.3% in February.
However, Owen does not consider this to be a collision.
In her opinion, a housing market crisis occurs when homeowners can no longer afford their mortgage payments, are forced to sell, and get insufficient proceeds from the sale to repay their outstanding debt. Nothing like that has been seen thus far in the current market.
Although the real estate market is undoubtedly in decline, Kilroy says a collapse is improbable because of robust economic fundamentals. The first is demand, which has increased because of factors including rising rents and a resurgence of international migration. While distressed sales have yet to appear in the housing market, she believes prolonged low unemployment is restricting the number of houses available for sale.
Impact of Increasing Rate
According to Kilroy, increasing interest rates are the driving force behind the slump in the real estate market. “Unlike an increase in unemployment or an oversupply in the market, a credit availability problem is driving this decline.”
The Reserve Bank of Australia has raised interest rates for seven months, bringing the cash rate to 2.85%, the highest level in nine years, after its first hike in May.
Owen agrees, saying, “This is the most rapid rise in the cash rate that Australia has experienced since the early 1990s, in reaction to extremely high inflation levels. This decline in home prices may be attributed mostly to rising interest rates, which have effectively reversed the upward trend driving the housing market.
Kilroy predicts that house values will continue to decline because of the impending announcement of a 0.25 percentage point increase in interest rates in December and further rate hikes in 2019.
The Future of the Property Market
Owen concurs, saying, “prices will continue to decline as long as interest rates are increasing.” However, she notes that the decreases are beginning to reduce in severity, with the 1.6% drop seen nationally in August falling to a 1.2% drop in October. Recently, the rate of falls has slowed, and a more ordered pattern has emerged.
According to Owen, the cost of debt is the strongest indicator of what’s to come in the housing market. If interest rates begin to decline, which Ms. Kilroy anticipates will happen in the fourth quarter of 2023 or the first quarter of 2024, home values are expected to soar.
Yet Kilroy cautions that home prices won’t quickly recover to their pre-boom levels since borrowing rates aren’t likely to fall as much as they did given the unusual conditions of a worldwide epidemic. She believes that interest rate cuts will stop around 2.6%.
How Low Can We Expect Prices to Go?
According to Kilroy, BIS Oxford Economics projections are “at the low end of the range compared to certain observers,” They anticipate a statewide peak-to-trough price decline of 11.5%, with the trough occurring in the second half of next year.
Not everyone will experience the same drops, however.
For example, “we have Perth homes at the opposite end of the range with a more moderate decline of 4%,” and “we are projecting a 13% fall for houses and 8% fall for units.”
Owen said the Big Four banks are predicting a median 16% drop in prices across all capital cities, even though CoreLogic doesn’t make predictions. According to projections, “this might be one of the greatest housing market downturns we’ve recorded.” However, it follows “one of the strongest upswings we’ve observed in Australia’s home market as well.”
