The year so far – first half property market snapshot
So far, this year has seen the pandemic boom of 2021 fading. There’s more choice for buyers and less competition, but interest rates have quickly moved higher, meaning prices have begun to fall in some regions.
Responding to higher inflation, the Reserve Bank has begun to hike rates. The cash rate moved off its record low in May and the RBA has since raised it a further 100 basis points, with two back-to-back 50 basis points rate hikes in June and July. It is widely expected that rates will raise further over the course of this year.
The latest labour force survey shows that in June the unemployment rate fell to 3.5% – the lowest level since August 1974, reinforcing the case for further interest rate hikes. This high level of job security is a bright spot for consumers, with strong employment conditions hopefully driving wages growth this year and offsetting budgetary pressures.
Interest rates have risen 125 basis points in the past three months and are expected to increase another 50 basis points in August.
Market pricing as of Thursday’s close implies a cash rate of above 3% by December. The RBA has signalled a desire to “get ahead of the curve” with respect to inflation pressures, so it’s likely the cash rate ends the year above 2%.
Before the RBA began lifting interest rates, fixed rates were already climbing off record lows as the RBA’s Term Funding Facility expired. The average rate paid on new owner-occupier loans increased late last year for the first time since the onset of the COVID-19 pandemic.
Still, increases in lending rates have been largely driven by fixed rate repricing, although as interest rates have risen so too have variable rates.
As home prices have increased in recent years, the cost of servicing a mortgage has been relatively affordable due to historically low interest rates. Now, the combination of interest rates moving sharply higher, rising mortgage rates, and already high home prices are eroding affordability, and in combination with expectations of continued price falls, prospective buyer demand is moderating.
In addition, as interest rates are expected to continue to rise, prospective buyers not only face higher borrowing costs but have more uncertainty than those over the past two years.
As interest rates have risen, home price growth has slowed Australia-wide.
But ahead of the RBA’s first hike in May, expectations of higher interest rates, already high home prices, and an improved balance between supply of properties for sale and demand, were already slowing home price growth.
National home prices fell in April this year for the first time since the pandemic onset, but the annual pace of price growth peaked in October 2021.
National home prices have fallen for the past three months, taking prices down a total of 0.55% from their peak in March.
While momentum has remained stronger in the smaller capitals, it is beginning to slow down in line with larger markets like Sydney and Melbourne.
This is particularly the case for Brisbane, but also Adelaide to some extent, suggesting that neither market will be immune from price falls as interest rates continue to climb.
With the RBA continuing to raise rates in the period ahead, we expect this is the beginning of the correction in housing prices, with the slowdown set to become more widespread as buyer demand further moderates.
However, it is important to put these expected price falls in context. We have seen extraordinary growth in housing prices over the past two years – a staggering 34% increase cumulatively since the pandemic onset in February 2020.
Listings
The first half of this year has seen exceptional strength in listing activity from sellers on realestate.com.au, with vendors who delayed until the uncertainty of lockdowns passed looking to capitalise on the price growth of recent years. Australia-wide, it has been the busiest first half for new listings in at least five years.
This increased choice has eased the level of competition among buyers, with an improved balance between supply and demand across most parts of the country. Where this is different is in Brisbane and Adelaide, where the total stock available for sale has declined significantly since the first half of 2021, meaning buyers have fewer options. A factor that continues to support stronger momentum in home prices in these markets.
Potential buyer demand
Across the capital cities it has been the busiest first half on PropTrack record for interest from potential buyers in Canberra and Perth.
Although the level of interest has moderated in recent months, total demand from potential buyers in the first half of 2022 has been stronger than the first half of 2021 in every capital city except Hobart and Sydney.
Demand per listing
Although, even with a lot of potential buyers, there are also a lot more listings in most parts of Australia.
This dynamic is rapidly shifting the balance back in favour of buyers, particularly in Canberra, Hobart, Sydney, and Melbourne where buyers have regained the upper hand from sellers, who had a firm grip throughout 2021.
On a per listing basis for houses, demand from potential buyers has dropped 19% in Canberra when comparing the first half of this year to the first half of last year. In Hobart and Sydney, the number of potential buyers per house listing has fallen 15% and 13% respectively when comparing that same period.
It is a little different for units, with demand from potential buyers slowing less quickly in the apartment market. That could be because the premium of house prices over unit prices reached record highs, with tough restrictions weighing on the appeal of apartment living and the pandemic driving one of the biggest shifts ever seen when it comes to housing preferences. But now financial conditions are tightening, and a normalisation of migration is placing renewed pressure on inner-city rental markets as the pandemic fades.
It is also a different story entirely in Brisbane and Adelaide. In Adelaide, on a per listing basis for houses, demand from potential buyers is up 22% when comparing the first half of this year to the first half of last year. On aer unit listing basis, demand is up 50% comparing the same periods. Benefitting from preference shifts toward larger homes, as well as affordability advantages, population growth, and workplace flexibility trends, both Adelaide and Brisbane have seen strength in market conditions so far this year.
Days on Site
As the housing market slows, properties are no longer selling as quickly. With more supply and fewer competing bidders, ‘fear of missing out’ has subsided. As a result. days on site have climbed and will likely continue to do so as the year progresses.
Sales
Comparing the period to date with the same in 2021, sales volumes have slowed the most in the regions. In the capital cities, Hobart, Sydney, and Melbourne are seeing transaction volumes slow the quickest compared to last year’s record levels. Sales volumes have also slowed in both Brisbane and Adelaide, but to a lesser extent.
The combination of rising mortgage rates and already high home prices is seeing fewer buyers and transaction volumes are slowing relative to the record high volumes seen through much of last year.
It is clear that last year’s boom has passed and the housing market so far this year is rebalancing off those extremes.
Mortgage rates have moved higher, and many buyers can no longer borrow the same amount as this time last year. That combined with expectations of price falls and weaker sentiment, is seeing heat coming out of the market Australia-wide.
Housing prices are already high and the increase in listings has provided a lot more choice for buyers, easing competition and further adding to the loss of momentum in housing market conditions.
From here, interest rates are expected to continue to climb, which is likely to further weigh on demand and cause an acceleration in the decline in prices.
CLICK HERE - WHAT'S YOUR HOME WORTH?
*Written by Eleanor Creagh, Senior Economist, REA Group
