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Weaker Oz House Prices To Reverberate In 2023

Australia | Oct 05 2022

Australian housing prices are forecast to continue declining as rising interest rates have yet to impact in full, with consequences for the broader economy in 2023.

-Further falls expected for Australian housing prices
-Peak decline may not arrive until next year
-Weak housing market anticipated to reverberate across the broader economy
-Housing markets might not stabilise until interest rates no longer rise

By Anna Rzhevkina

The Australian housing market is set for the sharpest downturn in decades as rising interest rates, high inflation, and sluggish wage growth put pressure on prices.

Housing values could fall by -15% peak-to-trough, which would be the largest decline since at least 1980, Tim Lawless, Research Director at real estate analytics provider CoreLogic told FNArena.

Lawless specified the peak decline is likely to occur during the first half of next year, although the exact timing remains uncertain.

The Reserve Bank of Australia on Tuesday lifted its cash rate for the sixth consecutive month to a nine-year high of 2.6%, while communicating that further tightening would still be needed to get inflation under control.

Housing prices in Australia have reacted quickly to rising interest rates that drive up borrowing costs.

CoreLogic’s national Home Value Index recorded a fifth consecutive month of decline in September, although the rate of decline eased to -1.4% from a -1.6% fall in August.

Every capital city apart from Darwin showed a decline in dwelling values in September.  Sydney continues to record the largest falls, with housing values now -9.0% or -$104,300 below the city’s January 2022 peak.

“Sydney looks most exposed to the sharpest downturn, with housing values peaking much earlier and falling more rapidly than other markets,” Lawless said. 

In September alone, housing prices in Sydney declined -1.8%. Over in Queensland, Brisbane has almost caught up with Sydney’s monthly rate of decline with prices falling -1.7% last month.

At the same time, more affordable markets such as Perth and Adelaide seem to be weathering the housing downturn.

Home values in these cities have declined only slightly since interest rates started to rise and the latest data on demographic trends paint a positive picture for housing demand, according to Lawless.

Estate agency Knight Frank says the three key drivers for smaller cities and regional residential markets include relocation of remote workers to less costly locations, investors seeking a higher rental yield than they could achieve in the larger capital cities, and people buying holiday homes. 

A snowball effect

While interest rates are the key factor shaping housing prices, weak wage growth, lagging behind inflation has also restrained demand.

Although the wage price index is increasing in all states, recent data released by the Australian Bureau of Statistics (ABS) show today’s increase remains lower than it has been since the turn of the century.

Senior Industry Analyst at IBISWorld Darcy Gannon expects sluggish wage growth and the rise in the ratio of interest payments to disposable incomes to make houses less affordable for Australians, placing downward pressure on residential properties.

“Furthermore, declines in housing prices limit investment activity as investors fear weak ROIs, demonstrating a snowball effect of declining confidence in the housing market,” Gannon told FNArena.

He added declines in migration after the start of the pandemic have reduced the number of arrivals to Australia and limited demand for housing.

IBISWorld forecasts housing prices to fall by -15.1% by the end of FY23.

The slowdown in Australia is occurring as housing prices in most countries around the world keep growing despite expectations of a slowdown due to global rate hikes, recession fears, and geopolitical tensions.

In the second quarter, global housing prices have been rising at 10% per annum, or 1.6% growth in real terms, according to Knight Frank.

Whilst global markets are showing resilience, the Asia Pacific region is ahead of the curve when it comes to the anticipated slowdown.

Australia and New Zealand are two of the seven countries in the region that have seen house prices declining between March and June.

At -0.8%, Australia saw the third largest decline on a three-month basis, while New Zealand recorded the biggest decline with prices down -3%.

Risks to the economic growth

Australian borrowers are generally more sensitive to interest rate movements compared to other countries because they tend to rely on mortgages with variable interest rates.

Only about 10-15% of home loans have a fixed rate and most of these are for a short period of about three years or less, Corelogic’s Lawless explains.

He added Australian households tend to have a larger concentration of their wealth in housing.

Rising housing prices generally boost consumer confidence and support consumption. In contrast, when property values are falling, this creates a reverse effect, with people taking a more careful attitude towards spending money.

Moreover, a weaker housing market has a direct negative impact on the economy.

Lower turnover in property deals means weaker demand for home furnishings, white goods, and appliances, and less activity across peripheral sectors such as conveyances, removalists, and building inspectors, Lawless points out.

Gannon of IBISWorld notes many people in Australia poured their money into property due to the historical strength and reliability of the country’s housing market.

According to Gannon, Australian investors rely primarily on asset growth as opposed to rental returns, which are common in investor approaches in other economies like the United States.

As a result, a sharp decline in housing prices could lead to a decline in the value of assets for many Australians.

No rebound at the horizon

Gannon expects high inflation to continue pushing up interest rates and putting pressure on the residential housing market.

He suggests prices for luxury homes in expensive areas could suffer the strongest declines, while cheaper housing is likely to be more resilient.

Surprisingly, the fall in housing prices is unlikely to make housing more affordable to first-time home buyers.

IBISWorld projects mortgage affordability to decline in the current year because increases in monthly repayments are likely to offset lower prices.

Lawless predicts the trajectory of housing values will depend on how high interest rates will go.

“Once interest rates stabilise, we expect housing prices will find a floor.”


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