Australian property market: seasonal slowdown or something more?

The big four banks are forecasting larger falls in our property market than previously predicted following the second cash rate hike in as many months¹.

ANZ became the latest lender to downgrade there housing forecast, now predicting property prices will fall 15% between April 2022 and December next year². Previously, the bank had expected prices to fall by around 12% over the same period.

The bank’s senior economists Adelaide Timbrell and Felicity Emmett said the downgrade was due to expectations of higher interest rates, as the Reserve Bank of Australia tries to get on top of surging inflation³.

“Our recent housing report noted that a steep increase in mortgage rates over the coming year would weigh heavily on house prices via reduced borrowing capacity,” Ms Timbrell and Ms Emmett said.

“This still applies, only the increase in mortgage rates is now expected to be larger and to come at a more rapid pace.”

The pair said the decline in prices was expected to be a result of lower borrowing capacity rather than forced selling, as many households had built up substantial savings buffers⁴ during the COVID-19 pandemic.

Because banks are required to assess whether a home loan applicant could still meet their loan repayments on an interest rate at least 3% higher than the current loan product rate⁵, a higher cash rate reduces the amount someone can borrow.

“Stronger household income growth, large savings buffers, increasing population growth via immigration and continued economic growth will all cushion the fall in housing prices as interest rates increase,” Ms Timbrell and Ms Emmett said.

The forecasts are in line with other major banks. Commonwealth Bank economists think prices will fall around 15% by December 2023⁶, and NAB is forecasting a drop of around 17% over the same period⁷.

2022 so far

Analysis by PropTrack shows the property market is experiencing the most rapid slowdown since 1989⁸.

Just six months ago the annual rate of home price growth nationwide was 24%, today it’s 14%.

But while a slowdown of this rate is almost unprecedented, context is critical.

Residential property prices surged a record 23.7% in 2021 alone, according to the Australian Bureau of Statistics⁹.

So if prices continue to fall, even by 15% as forecasted by some of the big banks, prices will still be above where they were in early 2021.

Last month national price growth fell for the first time since the start of the pandemic¹⁰, but only by 0.11%. Properties are also starting to take a bit longer to sell.

PropTrack Senior Economist Eleanor Creagh said Sydney, Melbourne and Hobart are seeing activity cool more quickly than Adelaide and Brisbane.

“The smaller capitals are benefitting from preference shifts toward larger homes, as well as affordability advantages and workplace flexibility,” Ms Creagh said.

“In May, home prices fell for the first time since the pandemic onset, but the smaller capitals Brisbane and Adelaide bucked the falling trend.

“However, activity has now begun to slow in both these markets, indicating that they will likely not be immune to price falls later this year.”

How long will the slowdown last?

Ms Creagh says the property market slowdown is partly due to increased mortgage rates and also higher home prices dampening affordability.

“Home prices have surged over the past two years and now mortgage rates are on the rise,” Ms Creagh said.

“This is seeing demand from prospective buyers continue to come back from the extreme levels witnessed in 2021.

“Further to this, expectations of price falls and continued interest rate rises are likely weighing on activity, in combination with the start of a seasonally quieter winter period.”

In a panel discussion on Australia’s economic outlook¹¹, REA Group chief executive Owen Wilson said despite the recent pullback, buyer demand on realestate.com.au still remains elevated.

“I think the demise of the property market [is] being called a little bit premature because I still totally believe in the supply and demand equation, and demand is still there,” Mr Wilson said.

“We’re getting over 12 million people coming to our site every month looking for property.

“If you look at the number of potential buyers per property it is still at five years highs, it’s come off, absolutely, and yes, house prices have come off but that probably needed to happen we were getting a bit frothy.”

Ms Creagh says the increase in listings this year, which is giving more choice to buyers and increasing the average time it takes for a property to sell, is bringing a healthier balance to the market.

“These factors are seeing slowing sales volumes and downward pressure on housing prices,” Ms Creagh said.

“Looking ahead, these headwinds will continue to slow demand from prospective buyers and it’s likely that activity will further ease, seeing price growth continue to moderate from the exceptional pace we’ve seen over the last year.

“From here, the magnitude and timing of further interest rate increases will be the key decider in the ongoing loss of momentum in housing market conditions.”