National dwelling values fell -1.0% in November, the smallest monthly decline since June

House prices are still falling, but the rate of decline is slowing.

National dwelling values fell -1.0% in November, the smallest monthly decline since June.

CoreLogic’s national Home Value Index (HVI) moved through a seventh month of decline in November, down -1.0% over the month to be -7.0%, or approximately -$53,400, below the peak value recorded in April 2022.

The decline comes after national housing values surged 28.6% higher through the recent upswing, adding roughly $170,700 to the value of the average dwelling.

Although values are continuing to trend lower, the rate of decline has been consistently moderating since the national index dropped by - 1.6% in August.

The easing in the rate of decline is mostly emanating from the Sydney and Melbourne markets but is also evident across many of the smaller capitals and most regional markets.

Three months ago, Sydney housing values were falling at the monthly rate of -2.3%.

That has now reduced by a full percentage point to a decline of -1.3% in November.

In July, Melbourne home values were down -1.5% over the month, with the monthly decline, almost halving last month to -0.8%.

The rate of decline has also eased across the ACT (from a -1.7% fall in August) and is no longer accelerating in Brisbane.

Most of the broad rest-of-state markets have also seen the pace of declines decelerate.

Potentially we are seeing the initial uncertainty around buying in a higher interest rate environment wearing off, while persistently low advertised stock levels have likely contributed to this trend towards smaller value falls.

However, it’s fair to say housing risk remains skewed to the downside while interest rates are still rising and household balance sheets become more thinly stretched.

There is still the possibility that the pace of declines could reaccelerate, especially if the current rate hiking cycle persists longer than expected.

Next year will be a particular test of serviceability and housing market stability, as the record-low fixed rate terms secured in 2021 start to expire

Brisbane and Hobart led the monthly rate of decline in November

Across the capital cities, Brisbane and Hobart (both down -2.0%) led the monthly rate of decline in November, while at the other end of the spectrum, Perth values held firm and Darwin nudged 0.2% higher over the month.

Perth and Darwin markets are yet to record any signs of a material reversal in housing prices.

A comparatively healthy level of housing affordability, along with tight labour markets and relatively strong economic conditions, have helped to insulate these cities from the downturn so far.

Unit markets have continued a run of relative resilience

In November, capital city unit values were down -0.6%, while house values declined at twice the pace with a -1.2% drop.

This trend has been seen throughout the downturn to date, with capital city unit values down -4.7% from the recent peak, while house values are down -8.4%.

Every capital city apart from Hobart is recording a more resilient outcome for unit values relative to houses.

This trend can at least partially be attributed to the more moderate gains recorded during the upswing, but probably also reflects the unit sector's more affordable price point at a time when borrowing capacity has reduced.

Sydney remains the only city where housing values have fallen by more than 10% from their peak

Through the upswing, Sydney values increased by 27.7% before peaking in January.

Despite the sharp fall in values through the downturn to date (-11.4%), Sydney home values remain 10.3% above pre-COVID levels (March 2020).

Due to a weaker upswing, Melbourne's values are only 2.8% above where they were at the onset of COVID.

If housing values continue to fall at the current pace of -0.8% month-on-month, Melbourne’s dwelling values could fall to pre-COVID levels by March next year.

Most of the other capital cities and broad rest-of-state regions are still recording dwelling values at least 25% above March 2020 levels.

The trend in new listings added to the housing market drifted higher through November

However, this year’s spring listing season has been mild.

Over the four weeks ending November 27, the flow of new capital city listings was -30.8% lower than a year ago and -14.2% below the previous five-year average.

The lower-than-normal number of new listings coming onto the market has helped to keep the total advertised stock below average as well.

Across the capitals, total listings haven’t been this low at this time of the year since 2010, and regional listings are at their lowest level since 2007.

This is likely a key factor offsetting the negative impact of higher interest rates and low consumer sentiment.

Every capital city apart from Hobart is recording total advertised stock levels below the previous five-year average.

While advertised supply levels are lower than normal, so too is housing demand.

Capital city home sales were estimated to be -23.2% lower than a year ago and -1.6% below the previous five-year average over the three months to November.

The largest fall in estimated home sales has been across Sydney, where the number of sales is down -38.6% relative to the same time last year and -23.9% below the previous five-year average.

Melbourne sales have also fallen sharply, -33.8% lower than a year ago and -15.5% below average.

Brisbane sales are down -18.4% on last year, but holding 14.4% above the five-year average while Hobart is the only other capital city to record a drop in sales compared with last year, down -13.8%.

The remaining capital cities have recorded a lift in estimated sales year-on-year.

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Given the trend in new listings has recently moved through a seasonal peak, we are likely to see activity from both a listing and buying perspective record a sharper decline around the middle of December through to late January as the festive season disrupts the home buying and selling process

Rental markets around Australia remain extremely tight

Vacancy rates are holding around 1% or lower in most regions.

Vacancy rates have been driven lower by a combination of low rental supply against rising rental demand due to the strong rebound in net overseas migration.

The number of capital city homes advertised for rent reached a decade-low through November and regional rental ads have not been this low since 2009.

At the same time, net overseas migration has bounced back rapidly, reaching record highs in some states through the first quarter of the year (most recent data); a trend that has likely increased further since that time.

Despite such tight rental conditions, there is some evidence that rental growth is easing across some cities

The quarterly trend in capital city rental growth peaked at 3.1% in July and has since reduced to 2.5%

The softening in rental growth is more apparent for house rents than units.

This could be a sign that rental demand is transitioning towards more affordable rental options such as the higher density sector.

It could also reflect a reversal of the pandemic trend towards smaller rental households.

As tenancy costs rise and renters struggle with affordability pressures, it’s logical that households would seek to maximise the occupancy of the dwelling in order to spread higher rental costs across a larger number of tenants.

Finally, there may be some rental demand easing in the detached house segment as the large backlog of housing construction projects is completed.

Gross rental yields continued to recover from recent record lows

Gross rental yields across the combined capitals rose to 3.50% in November, up from a recent low of 2.96% in February and only 17 basis points below the decade average (3.67%).

Gross yields are rising across regional Australia as well, from a recent low of 4.04% in April to 4.43% in November.

Despite the recent recovery, regional yields are still 59 basis points below the decade average.

Housing outlook

1. The trajectory of interest rates remains the most important factor for housing market conditions. 

The RBA has settled into a more moderate cadence of rate hikes, moving from 50 basis point increases in the cash rate to 25 basis points in October and November.

Although the RBA could revert back to a more aggressive policy stance, there is a good chance Australian interest rates will peak in the first half of 2023, if not in the first quarter.

In December we are likely to see the cash rate reach 3.1% (if the RBA lifts the cash rate a further 25 basis points), taking the cumulative increase to three percentage points.

Importantly, this takes interest rates to the limit of mortgage serviceability assessments recent borrowers were ‘tested’ on.

To date, bank reporting shows mortgage arrears have held record lows, but 90-day arrears rates are likely to rise over time given the higher interest rate setting and elevated inflation against a backdrop of record levels of household indebtedness.

If interest rates move materially beyond 3.1%, it is reasonable to expect a more substantial rise in mortgage distress, especially when considering the high cost of living pressures.

2. A lift in fixed mortgage rate refinancing activity from Q2 next year adds to the downside risk of higher mortgage distress.

The RBA recently estimated around 35% of outstanding housing credit was on fixed-term rates, which is higher than normal; historically around 20% of home loans would be on fixed-term rates.

Further, the RBA expects about two-thirds of these loan terms will expire by the end of 2023, with borrowers facing a three to four-percentage-point rise in their mortgage rate.

3. While mortgage arrears are likely to progressively rise from record lows, the risk of a material lift in defaults remains low. 

Tight labour markets will be the key safety net helping to keep a lid on defaults.

The unemployment rate, recorded at a generational low of 3.4% in October, is set to rise into 2023, but not to above-average levels.

Forecasts from Treasury and the RBA, along with the private sector, generally put unemployment around the mid-4% range in 2024, which is still well below the 10-year average of 5.5%

4. Household savings and a history of higher-than-required mortgage repayments should also provide a buffer to higher mortgage rates and cost of living pressures.

The RBA recently noted the median variable mortgage rate borrower had enough in their offset/redraw accounts to cover 20 months of mortgage repayments (as at August).

5. Persistently low inventory is helping to balance out the slump in housing demand.

With advertised stock levels well below average across most markets, there is no evidence of an oversupply of homes available to purchase.

A rise in advertised stock levels would be a warning sign for a reacceleration in the downturn, but this is looking unlikely, at least in the near term.

6. As housing values trend lower and incomes rise, some measures of housing affordability are easing.

Across the combined capitals, the median dwelling values to income ratio reduced from 8.4 in the March quarter to 7.9 in Q3.

The number of years estimated to save a 20% deposit also trended lower, from 11.1 in March to 10.6 in September.

An improvement in these metrics implies lower barriers to entry for first-home buyers.

7. The flipside to lower affordability barriers is worsening serviceability costs.

The portion of household income required to service a new mortgage was already rising before interest rates moved from record lows.

With interest rates trending higher, the portion of median household income required to service a variable rate mortgage is back to the highest level since Q3 2008 when the cash rate was 7.0%.