Our property market continues to surprise us.
Although the desire to purchase property has decreased slightly, the limited number of properties available on the market has led to heightened buyer competition in all major cities, except for Hobart, reaching its highest level in a year.
In fact, according to PropTrack's latest data, the overall demand to buy property, as measured by the number of potential buyers seriously engaging with listings on realestate.com.au, has moderated.
This is obvious as mortgage affordability has deteriorated, consumer confidence has fallen, and expectations of continued home price falls have weighed.
Eleanor Creagh, Senior Economist for PropTrack commented:
"Demand has declined 12% from 2021’s peak levels in the combined capital cities and by a lesser 6.3% in combined regional areas, though some of the individual capital cities and the rest of state territories have seen significantly larger falls.
This downshift in buyer demand has contributed to slower selling activity, and market conditions have shifted relative to the extreme levels of activity recorded throughout the pandemic boom and into the start of 2022 before interest rates began their quick ascent.
While activity in the housing market has fallen as conditions have shifted, the softness in new listing activity that has persisted since spring last year led to a pick up in competition among potential buyers in January 2023."
The property market experienced robust activity and new listings during the spring of 2021 and the early months of 2022.
However, with the recent surge in interest rates and declining home prices, market sentiment has weakened, leading to fewer sellers listing their properties for sale, thereby limiting supply.
Despite this, the good news is that the slowdown in the market cycle and falling prices are not caused by panic or forced selling.
Ms Creagh explained:
"Regardless, the result is less transaction activity and less choice for buyers in most markets relative to pre-pandemic averages.
This means that even though demand to buy property has weakened, there are fewer buyers needed in the lower volume market.
But also, those potential buyers that remain have less choice than is typically the case."
With increased competition, both buyers and sellers are constrained to be price-takers.
Moreover, the limited supply of properties available for sale in some of the capital cities has tempered price falls.
Ms Creagh further explained:
"In Adelaide, Perth, regional Queensland and regional South Australia potential buyer demand per listing is at a record high, indicating that these markets remain competitive, despite national home prices falling for the 10th consecutive month in January.
In some of the other capital city markets, although demand per listing has fallen from its peak, in comparison to spring last year demand per listing in January 2023 was higher, indicating that competition among potential buyers has increased into the new year and is up off levels seen during the spring selling season of 2022.
This is the case for every capital city except Hobart, where total listings are up more than 30% in comparison to the previous 5-year average.
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That increase in choice has eased competition and demand per listing has almost halved year-on-year in Hobart."
Of course, these dynamics have been heavily influenced by the availability of properties for sale and with sellers holding back from listing their property for sale constraining supply, potential buyer interest is being concentrated assisting in fueling a degree of competition, with lower stock levels likely underpinning home prices to a certain extent.
According to Ms Creagh, this has several implications:
For sellers, while prices aren’t where they were, nationally they remain close to 30% above pre-pandemic levels, which means many sellers are sitting on sizable equity gains even amid price declines, and those that are realistic on price expectations may find that selling conditions aren’t quite as soft as expected.
This is also somewhat reflected in the auction market at present, where auction volumes and clearance rates are lower than they were at the same time last year.
However, clearance rates are now higher than they were through the back half of last year when the fast turn in conditions saw many sellers slow to acclimatize to falling prices, as buyers flipped from being fearful of missing out to becoming fearful of overpaying."
Obviously, after 10 or more months of price falls in the larger auction markets (Sydney and Melbourne), the shift in clearance rates likely reflects the expectation gap is closing, with an increased meeting of the market between sellers and buyers, resulting in more properties clearing at auction.
As for the implication for buyers, Ms Creagh commented:
"There’s still a lot less competition than through the pandemic period in most markets and the fraught conditions and fear of missing out have eased.
Rising mortgage rates, inflation and economic uncertainty have dampened homebuying demand as well as home prices, and with sellers now adapting to current conditions, there’s more capacity for negotiations.
Interest rates are now likely closer to their peak than not, and some of the uncertainty buyers experienced last year with respect to borrowing capacities and mortgage servicing costs is reducing, meaning a better sense of how far their budget will go, with most expecting just a few more rate rises to come."
Well, there are factors beyond interest rates that are in play.
Although interest rates have played a major role in the decline of home prices so far, the limited supply of homes for sale is now serving as a potential support for prices, and the decrease in demand for home purchases has been partially compensated for by a reduction in the number of property listings.
Ms Creagh said:
"The upcoming fixed term expiry, which many took advantage of record low fixed rates during the pandemic, will experience this year, will therefore be a key test for housing market conditions in the coming months.
Though the close record low unemployment rate and large household savings made through the substantially cheaper fixed period should provide a safety net.
And although the budgetary adjustments will be large as much higher mortgage repayments weigh, most are likely to prioritize their mortgage repayments over selling their home, though this will be a significant drag on spending in the coming months.
The PropTrack Home Price Index has shown the housing market correction losing momentum in recent months, with the pace of price falls easing in most markets.
If the softness in new listings remains, this is likely to continue to counter the downward pressure on home prices from the substantial move higher in borrowing costs and reduction in borrowing capacities.
In addition, positive demand drivers stemming from the shortages in rental supply and resultant strong rental price pressures, alongside the strong rebound in international migration, remain."
Source of charts and commentary: REA Insights