Are more buyers being drawn to cheaper properties?

According to PropTrack’s Housing Affordability Report, housing affordability is at its lowest level in three decades. Record growth in home prices during the pandemic coupled with rapid interest rate hikes from mid-2022 are key contributors to the challenging market conditions.

Compared to 2020-21 when interest rates were at historic lows, household borrowing power has decreased by 34%[i], meaning that people are now able to afford a smaller share of homes.

Household borrowing power has decreased since interest rate hikes. Picture: Getty

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With home prices continuing to reach new peaks after 17 months of consecutive growth, buyers will need to pay higher monthly repayments and save longer for homes. Is this leading to more buyers looking for affordable homes?  

By analysing trends in price growth at both national and capital city levels and days on market at a suburb level, we aim to answer this question.

Properties at the cheaper end of the market have seen larger growth in their values since interest rate rises

Since May 2022, the Reserve Bank of Australia (RBA) has increased the cash rate 13 times from its all time low of 0.1% to 4.35%.

During this period, cheaper homes have appreciated in value faster than more expensive ones. We can see this as the 25^th percentile estimated home values (homes cheaper than 75% of others) have increased by 13% while the estimated values of homes in the 75^th percentile (homes cheaper than only 25% of the market) have only risen by 3%.

Cheaper homes have also grown more than twice that of a typical valued home (median).

Given the positive relationship between demand and price growth and the current shortfall in supply, this suggests that there has been stronger demand for affordable homes compared to more expensive ones.

This trend is likely due to significant decreases in loan amounts to potential buyers following interest rate increases, pushing them towards cheaper housing options.

Not only is this evident at a national level but also within our capitals.

Regions with the largest home price growth tend to be cheaper but not in every city

Buyers in our smaller capitals favoured more affordable homes, with competition likely boosting growth in regions where median prices were lower.

We can observe this by looking at the two-year growth rate of home prices in our capital city SA4s, geographical regions with populations ranging from 100,000 to 500,000 as per Australian Bureau of Statistics standards.

Properties in Mandurah, Adelaide – North and Ipswich, areas with the lowest median AVMs in Perth, Adelaide and Brisbane respectively, saw the largest percentage increase in home prices within their city.

By contrast, SA4 regions with the highest medians experienced less growth in their property values.

However, the trend differs in our largest capitals where home prices are steeper.

In Sydney, price growth did not vary according to the value of homes in each region, implying that demand was quite similar across the market.

In Melbourne, regions with higher median AVMs tended to outperform those with lower AVMs, which suggests that the premium market is more popular among buyers in our second largest city.

While there generally appears to be a stronger inclination towards affordable regions, it was not the case in our pricier cities.

The suburbs that have become more sought-after among buyers tend to have lower medians than their respective region

The trend, however, is apparent when we examine the relationship between suburbs where demand has risen and their respective home values.

Growth in demand in this instance is represented by a decrease in the median days on market, the number of days a property is on realestate.com.au before it is sold.

Among the suburbs in each state experiencing the top three largest declines in days on the market over the past two years, 60% have median home values below their respective SA4 median, while an additional 27% fall within $200,000 of the regional median.

This reflects an increased interest from buyers for suburbs with lower-priced homes following interest rate hikes that began in May 2022.

Will buyers continue to seek out cheaper properties?

With the cash rate at its highest level in 12 years, potential buyers are faced with higher repayments and decreased borrowing capacity.

Coupled with the ongoing growth in home price as well as a shortage in the supply of new homes entering the housing market has become increasingly difficult.

If the current trends persist, affordability may worsen, prompting more people to seek homes in less expensive areas. This will likely result in cheaper regions continuing to outperform their pricier counterparts.

While interest rate cuts may alleviate some of these pressures by boosting buyer confidence and borrowing capacities, they could also stimulate more demand for properties across all price points, driving home prices up further.

With rate cut expectations pushed out to late-2025, buyers could continue to face difficult conditions for some time to come.

[i] Assuming an owner-occupier new loan rate of 2.7% in 2021 and a current rate of 6.3% on a 30 year mortgage.