Home price decline eases, property market downturn loses momentum

Despite skyrocketing interest rates and continuous price falls over the past year, Australia's property market has now seen a slight upturn, according the latest PropTrack Home Price Index report.

According to the report, in February, national home prices rose by 0.18%, except for Hobart, which experienced a decline.

Adelaide, Sydney, and Melbourne saw less than 0.5% increases, with limited stock levels leading to high competition for properties.

Meanwhile, Brisbane, Perth, and Darwin experienced smaller increases of about 0.1%, and prices in Canberra remained unchanged.

Stalling in home price falls observed

For nine consecutive months, national home prices experienced a decline, primarily due to the significant cash rate tightening implemented since May last year, which impacted home prices across most parts of the country.

However, the housing market correction has lost steam in recent months, and the rapid pace of price falls observed in June and July 2022 when interest rates initially began to rise has slowed down.

As a result, the pace of price falls has eased in most markets.

National home prices experienced a slight uptick in February 2023, rising by 0.18% and bringing the cumulative bounce to 0.27% since the revised figures recorded a small uplift of 0.09% in January 2023.

Despite the rise, prices remain 3.90% below their peak in March 2022 but are still 29.4% higher than pre-pandemic levels.

However, I believe it is too soon to determine if the market downturn has ended.

While interest rates have been the primary factor driving home price falls, other elements are at play.

Sellers in the current market are benefiting from the low competition, as the limited availability of properties for sale has concentrated buyer demand and is providing some support to home prices.

Although there has been a moderation in homebuyer demand, the current level of buyer demand is sufficient to prevent prices from falling to the extent that the calculated shift in borrowing capacities would suggest.

Eleanor Creagh, Senior Economist at PropTrack commented:

"Even though we know homebuyer demand has moderated, with fewer properties listed for sale, there is still sufficient buyer demand to help keep prices on the downside resistant to the falls the calculated shift in borrowing capacities would imply.

This means the longevity and depth of the current downturn will be influenced by the level of supply, as well as the trajectory of interest rates, in the months ahead.

With additional rate rises expected, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, weighing on prices.

The significant reduction in borrowing capacities is yet to be fully reflected and implies further price falls.

If we see an increase in stock levels in the coming months, that will remove a pillar of support for home prices, and together with the downward pressure from rate rises, weigh on prices over the next few months.

However, if the listing environment remains constrained, with fewer properties coming to market and low supply persists, that may continue to put a floor under prices and counter the downward pressure from the continued increase in interest rates we expect.

Positive demand drivers stemming from the shortages in rental supply and a rebound in international migration also remain."

Regional areas continue to hold better than the capital cities

In February, home prices in the combined capital cities increased by 0.26%, yet they still remain 4.65% below the prices recorded a year ago and 4.86% below their peak.

Meanwhile, regional areas experienced a slower pace of price falls, with a minor increase of 0.01% in February.

Regional prices were down by 0.47% from February 2022 levels and 2.14% from their peak.

In all states, regional markets have outperformed their capital city counterparts in terms of annual growth.

Ms Creagh further commented:

"Although the pace at which net internal migration flows into the regions were occurring through the pandemic period has eased, they remain elevated relative to pre-Covid levels.

These population flows alongside demand for more affordable homes have provided downside support resulting in regional areas faring better than capital city areas even as housing market conditions have shifted.

In addition, conditions remain tougher for regional buyers, with the number of properties listed for sale still well below pre-pandemic levels, which is also seeing some markets remain more competitive and shielding home values.

The good news is this process has begun to ease in recent months but comparing the available stock on market to pre-pandemic averages it's clear that there's much less choice for buyers in the regions.

This is particularly the case in regional SA, the strongest performing region nationwide over the past year where home prices are up 11.85% since February 2022 and still rising to fresh record highs."

Prices in every capital city bounce in February, except Hobart

Except for Hobart, which experienced a decrease of 0.29%, home prices have risen in every capital city over the past year.

The strongest-performing market was Adelaide, with a 0.44% increase, while Sydney and Melbourne recorded the largest jumps at 0.36% and 0.18%, respectively.

This trend is largely influenced by the limited availability of properties for sale, which has concentrated buyer interest and supported home prices.

Despite fewer homes on the market, Sydney experienced the largest overall decline in prices, with a 6.64% decrease from a year ago.

However, the recent bounce in Sydney prices may be attributed to tax changes introduced by the New South Wales government, allowing first-home buyers the option to pay annual land tax rather than one-off stamp duty, thus boosting their purchasing power.

The steepest declines in home prices have been recorded in the more expensive capital cities, with Sydney leading the way, followed closely by Melbourne, where prices have dropped by 5.99% over the same period.

From their peaks last year, Sydney and Melbourne prices have fallen by 6.64% and 6.09%, respectively.

Despite falling from their peaks, home prices in both capital cities are still higher than pre-pandemic levels.

This trend is not unique to these two cities, as home prices have decreased in every capital city and regional area across Australia.

In February, home prices in Brisbane increased by 0.12% from the previous month and were 1.61% lower than a year ago.

The city's property market conditions shifted significantly last year due to the tightening of interest rates, with prices falling by 3.49% from their April 2022 peak.

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However, the total number of properties listed for sale in Brisbane is currently almost 30% below the previous five-year average.

This limited supply of properties for sale is causing potential buyers to compete for available homes, thus supporting home prices to a certain extent.

In February, Hobart was the only capital city to experience a decline in home prices, with a decrease of 0.29% from the previous month.

This decline has brought home prices in Hobart 4.09% lower than the peak recorded in April 2022.

Unlike other capital cities, Hobart has seen an increase in total property listings, up more than 30% compared to the previous five-year average.

This increase in supply has caused demand per listing to almost halve over the past year, which, combined with the impact of interest rate rises, has contributed to falling home prices in Hobart.

Adelaide, Perth, and Darwin have experienced a slower pace of price falls and remain the strongest-performing capital city markets over the past year, with home prices yet to fall below their year-ago levels.

The comparative affordability of homes in these cities has provided some insulation against price declines.

Adelaide has been the strongest-performing market, with a 7.87% increase in home prices over the past year.

Perth has also outperformed other capital cities, with home prices rising by 2.49% over the past year, after a decline of just 0.24% from their peak in November 2022.

National house prices rose by 0.13% in February, while unit prices jumped by 0.46%.

However, compared to their respective peaks last year, national house prices have fallen by 4.28%, compared to just a 2.01% decline for units.

The substantial tightening pushed through has resulted in houses experiencing a faster decline in value.

The maximum borrowing capacities for potential buyers have been reduced by approximately 30%, which has shrunk their budgets.

As a result, these affordability constraints, coupled with strong rent growth, have prevented a sharp decline in demand for apartments, as units offer a relatively better value proposition.

The shift in pandemic preferences and the relative affordability of properties continue to influence prices

Over the past year, regions in South Australia, Queensland, and regional NSW have recorded close to 15% growth in some areas, with South Australia being the stronghold and home to half of the top ten regions with the highest growth.

These markets continue to benefit from pandemic-induced preference shifts, relative affordability advantages and migration shifts.

Ms Creagh explained:

"As interest rates have risen substantially, not only have mortgage servicing costs surged but borrowing capacities have been reduced by around 30%, meaning conditions are tougher for prospective buyers.

With the fast pace of rate rises and the corresponding reduction in borrowing capacities that has dented affordability, potential buyer demand and home prices have held up better in markets that are more affordable on a relative basis.

Looking across the capitals, the outperformance of more affordable regions and the peripheral parts of cities is clear.

Higher willingness to pay for larger homes and reduced commuting requirements have led to a strong performance in these areas since the onset of the pandemic."

What's ahead?

The housing market experienced a sharp adjustment in 2022, as rising interest rates quickly rebalanced the market from the extreme growth seen throughout the pandemic period.

As a result of the substantial tightening implemented since May, national home prices fell for nine consecutive months, with prices dropping in most markets.

However, in recent months, the correction in the housing market has lost momentum, and the rapid pace of price falls experienced in June and July 2022, when interest rates first began to rise, has subsided.

Currently, sellers in the market are benefitting from the low competition with other vendors, as buyers compete for available stock. The limited supply of properties for sale has intensified buyer demand, which has helped to "put a floor" under home prices to some extent.

However, it is still too early to determine whether the housing market downturn has come to an end.

Ms Creagh said:

"Even though homebuyer demand has moderated, with fewer properties listed for sale in many markets, there is still sufficient buyer demand to help keep prices on the downside resistant to the falls the calculated shift in borrowing capacities imply.

This means the longevity and depth of the current downturn will be influenced by the level of supply, as well as the trajectory of interest rates, in the months ahead.

With additional rate rises expected, borrowing costs will continue to increase and maximum borrowing capacities will be further reduced, weighing on prices.

It will take time for higher interest rates to fully affect prices and the significant reduction in borrowing capacities is yet to be fully reflected and implies further price falls.

If we see an increase in stock levels in the coming months, that will remove a pillar of support for home prices, and together with the downwards pressure from rate rises, weigh on prices over the next few months."

If the current situation persists, where the listing environment remains restricted with limited properties coming to the market and low supply persists, this may continue to support prices and counter the downward pressure from the anticipated increase in interest rates.

Additionally, there are positive demand drivers stemming from the shortage in rental supply and the rebound in international migration, which could contribute to the housing market's resilience.

Ms Creagh explained further:

"Even as interest rates continue to rise, we’re closer to the peak in interest rate tightening than not and if the Reserve Bank hits pause on its tightening cycle this year home prices will likely begin to stabilise as some of the uncertainty buyers have experienced with respect to borrowing capacities and mortgage servicing costs reduces.

Regional markets, and the comparatively affordable capital city markets like Adelaide and Perth continue to exhibit a lesser pace of price falls buoyed by shifting lifestyle priorities, migration trends, and affordability advantages that are still in play.

To date these shifts have continued to buffer price falls. While increasing borrowing costs are a headwind for prices, the comparatively affordable capitals and regional markets are likely to continue to exhibit a lesser pace of price falls."

Source of charts and commentary: PropTrack Home Price Index report