Has the Australian housing market reached a turning point?

Key takeaways

National home prices in Australia decreased slightly more than 4% from peak to trough but are now rising again, with Sydney spearheading the recovery.

The high level of buyer demand is helping to maintain prices resilient against the declines that the calculated shift in borrowing capacities would indicate.

The supply of properties available for sale, immigration rates, new home construction, limited rental markets, and interstate and regional migration all influence trends in home price growth and how they are distributed across the nation.

After a steep decline during the downturn, the pricier regions of Sydney and Melbourne are experiencing the most significant rebound in prices.

According to many property commentators, we are now at or very close to the peak of the interest rate cycle, and home prices are likely to further stabilize. However, the "fixed rate mortgage cliff" will be a crucial test of market conditions and whether the downward pressure on prices will intensify.

Following a decrease from its peak to a trough of slightly more than 4%, it seems that national home prices are now on the rise again, with Sydney spearheading the recovery.

The housing market began the year with more strength, and after nine consecutive months of decline, home prices increased for the third time in 2023 March according to Proptrack economist Eleanor Creagh.

Market conditions have strengthened, and despite lower auction volumes than during our boom times, clearance rates have reached their highest point in a year.

Moreover, they continue to remain high compared to the latter half of last year, when a rapid increase in interest rates created a mismatch between buyer and seller expectations.

Increased mortgage rates, inflation, and economic uncertainty have subdued demand from homebuyers, causing a decline in sales volumes from the robust levels seen in 2021 and early 2022.

During the first 12 weeks of 2023, national sales volumes were 24% lower than in the same period in 2022.

However, they are still similar to the levels observed in the same period in 2020 and higher than the volumes recorded in the first 12 weeks of 2019.

Now buyer sentiment has turned and they are back out again and they are carefully picking through the properties for sale.

What’s driving the rebound?

Although interest rates have been the leading cause of home price declines so far, there are other factors affecting the market.

The supply of properties available for sale, immigration rates, new home construction, limited rental markets, and interstate and regional migration all influence trends in home price growth and how they are distributed across the nation.

Presently, the slower influx of new listings and limited available stock, along with tight rental markets and a robust rebound in immigration, are counterbalancing the downward pressure from increased interest rates.

As compared to the same period in the previous year, fewer properties are being listed, creating a more competitive purchasing atmosphere and uplifting home values.

The high level of buyer demand is helping to maintain prices resilient against the declines that the calculated shift in borrowing capacities would indicate.

The markets that previously experienced a downturn are now at the forefront of the emerging recovery

PropTrack Home Price Index shows Sydney has spearheaded the recovery in home prices to date, with the most significant surge in values amongst all capital cities in the past quarter.

Home values in Sydney rose by 1.01% over the March quarter, marking the fastest pace since the December quarter of 2021.

Furthermore, as Sydney also suffered the most significant downturn and experienced a decline of 7.19% from the peak to the low point recorded in December 2022, this could be another factor fueling buyer interest.

Despite a decline of 6.25% from their peak, Sydney prices have only slightly reversed the pandemic boom, with home prices still standing 22.8% higher than pre-pandemic levels.

Although home prices have fallen from their peak in most markets, they still remain significantly elevated compared to pre-pandemic levels in every capital city and regional market throughout Australia.

When analyzing smaller geographic areas, regions that experienced the largest downturns seem to be spearheading the emerging recovery.

Upon further examination of the data by percentile value, it appears that while the lower end of the market fared better during the downturn, the upper end is fueling the recovery.

After a steep decline during the downturn, the pricier regions of Sydney and Melbourne are experiencing the most significant rebound in prices.

Usually, more expensive housing stocks register more substantial declines, which could explain why opportunistic buyers are re-engaging.

A similar pattern has been observed in previous cycles, with the upper end of the market leading both the downturn and the subsequent recovery.

What’s ahead?

According to many property commentators, we are now at or very close to the peak of the interest rate cycle.

Although the significant reduction in borrowing capacities and deterioration in affordability suggests larger price falls, the downward pressure on prices from the substantial tightening already implemented is being offset by strong demand drivers.

The strong rebound in immigration, tight rental markets, and limited stock on the market are supporting home prices.

With the RBA pausing its tightening cycle, the bottoming-out process is expected to continue, and home prices are likely to further stabilize as some of the uncertainty for buyers decreases.

As the end of rate rises comes into sight, buyers and sellers can better adjust to the higher interest rate environment and proceed with their property plans.

However, if inflation pressures turn out to be more persistent than expected, this could change.

In the coming months, stock levels will also play a role in influencing home prices.

If the listing environment remains limited, with fewer properties coming to the market, this may continue to provide a floor under prices.

Nevertheless, there are still headwinds to contend with, as the full impact of recent rate rises has yet to be felt.

The fixed-rate mortgage cliff?

In the coming months, the "fixed rate mortgage cliff" will be a crucial test of market conditions and whether the downward pressure on prices will intensify.

Higher interest rates take time to impact household cash flows, and many borrowers who took advantage of record-low fixed rates during the pandemic have yet to feel the full impact of rate rises.

According to CBA's loan book, one in two outstanding fixed-rate home loans is set to expire this year, with many borrowers facing large increases in mortgage repayments.

The RBA's Securitisation Dataset shows that about 35% of outstanding mortgage debt is fixed, and about 70% of that debt is due to roll onto variable loans this year, resulting in a substantial increase in servicing costs.

While large savings made during the cheap fixed period and the current level of competition may provide some respite for those able to refinance with a different lender, this will still be a challenging period that requires substantial budgetary adjustments.

Banks will be working with their customers to minimize this "cliff" as much as possible.

However, strong home price growth during the pandemic and tight labour market conditions provide a safety net for many households.

Homeowners are expected to prioritize their mortgage repayments, potentially leading to a decrease in household spending in order to avoid mortgage defaults or distressed sales.

This may result in a sharp slowdown in consumer spending over the coming months, as the full impact of the previously implemented interest rate increases catches up.

Despite this, the housing market appears to be entering a bottoming-out process, with the end of the rate hike cycle and continued strong demand drivers potentially stabilizing home prices.

However, the upcoming "fixed rate mortgage cliff" presents a key test for the market, as many borrowers with outstanding fixed-rate loans face large increases in mortgage repayments as their terms expire in the coming months.

The concept of this blog is inspired by Eleanor Creagh's article in REA Insights. 

About Brett Warren Brett Warren is National Director of Metropole Properties and uses his two decades of property investment experience to advise clients how to grow, protect and pass on their wealth through strategic property advice.