Australian housing values grew 22.1% last year and the market is showing signs this extraordinary rate of growth – not seen since the 1980s – is slowing across most of the capital cities.
Yet as the rate of dwelling value appreciation slows, the capital city and broad ‘rest of state’ markets are yet to peak, causing plenty of speculation about whether this will occur in 2022 and mark the start of a downturn.
When to call a peak in housing values
To categorise a market peak across a region, we would generally be looking for a consistent trend in negative monthly movements.
To date, the quarterly trend remains positive across the major regions, with the only exception being Darwin houses, which is the only capital city housing sector to record a negative quarterly change.
The Darwin reading can be more volatile than other cities due to the small size of the market, so it may be too early to call a peak in this market even though the quarterly growth rate has turned negative.”
Peak vs peak rate of growth
Although we can’t see any evidence that specific housing markets have peaked, it is clear that most markets have moved through a peak rate of growth.
What I mean by that is the point at which markets achieved their biggest monthly growth rate.
We saw most of the capitals moved through a peak rate of growth around March last year.
Sydney’s monthly growth rate peaked at 3.7% in March and has since reduced to 0.3%.
Melbourne’s monthly growth rate peaked at 2.4% in March, reducing to -0.1% in December (the first monthly decline since Oct 2020).
Perth’s monthly growth rate peaked at 2.7% in February.
After recording only a single month of decline (-0.1% in Oct 2021) the monthly rate of growth has reaccelerated to reach 0.4% in December.
Hobart’s monthly growth rate peaked at 3.3% in March and dropped to 1.0% in December.
Darwin moved through a peak rate of monthly growth in April at 2.7% (0.6% in December).
Canberra moved through a monthly peak in March at 2.8% (0.9% in December).
Market exceptions and future expectations
The only broad regions avoiding a slowdown in the pace of growth in housing values are Brisbane, Adelaide, and regional Queensland.
These markets are benefitting from a healthier level of affordability compared with the largest capitals along with a positive demographic trend and consistently low advertised stock levels.
We could see our two biggest capital city markets Sydney and Melbourne hit their peak later this year although the timing is highly uncertain and depends on a broad range of influences.
Three main factors that determine when and if a market peak will occur
There are a lot of moving parts that will affect the trajectory of housing outcomes.
The three biggest factors to impact market movements are:
- Policy-related factors such as interest rates and credit availability.
- Market factors like the trend in advertised stock levels and housing affordability.
- Economic factors such as labour market conditions and wages growth.
Arguably, the surge in COVID cases associated with the Omicron variant could push some of these policy tightening decisions back, with APRA or the RBA unlikely to tighten their policy settings with so much uncertainty associated with the latest case numbers.
There is also some downside risk from a delayed economic recovery associated with less spending activity and heightened uncertainty, although a slower than forecast economic recovery implies rates would stay lower for longer.
Key signals that a market is approaching its peak
Normally, housing growth trends will gradually slow before moving into a correction phase, which is what we are seeing at the moment.
However, this isn’t always the case.
During periods of shock such as the GFC or early in the pandemic, housing trends turned quite sharply into negative territory.
Other signs to watch for include:
- rising advertised stock levels
- affordability constraints
- weakening auction clearance rates, and
- softening vendor metrics such as longer days on market and larger levels of discounting.
It’s fair to say we are currently seeing a softening in all of these metrics, albeit from a historically high base.
We also consider macro factors, which could have an impact on housing demand such as the potential for higher interest rates or tighter credit policies.
Both of these factors have a high level of uncertainty at the moment, especially considering the latest wave of COVID cases associated with Omicron which could weigh down economic activity.
What to expect following a market peak
Once a market peaks, the typical trend is that values will experience a period of decline.
The duration and severity of the decline are dependent on a broad range of both macro and micro factors.
Since the late 1980s, Australia has experienced national downturns that have ranged in severity from a -1.0% peak to trough decline in 2015-16, a temporary correction following the first round of credit tightening via APRA’s 10% speed limit on investment lending, to the most recent -8.4% decline experienced during the 2017-19 downturn.
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