Most rapid slowing down in house prices in 30 years.

If you're like many Australians, you might be wondering, what's the slowdown in home prices mean?

Property price growth has slowed down quickly in 2022, showing home prices fell in May - the first decline since the start of the pandemic.

Paul Ryan, Economist for the REA Group shared his insights:

"The annual rate of home price growth across the country has slowed from a rapid 24% six months ago to a still-remarkable 14% now.

But this change is almost unprecedented.

Comparing home price changes over six-month periods, it is the most rapid slowdown we have experienced since 1989."

Annual price growth has slowed

The annualised six-month ended price growth in the capital cities was 18 percentage points lower than just six months ago in both April and May this year.

This is in fact a more rapid slowdown than we saw in both 2004 and during the Global Financial Crisis in 2008.

Mr Ryan further commented:

"Perhaps this is not surprising – 2021 was the third-fastest period of home price growth in Australia’s history.

But it is not necessarily the case that property price growth falls rapidly after a run-up.

In general, the market moves more gradually, indicating there are other factors involved.

Interest rate expectations have been the key driver of this slowdown.

Financial markets expect the Reserve Bank cash rate to be 2.75% at the end of the year.

Six months ago, they expected the cash rate to be around 0.75%.

That is a big shift in a short period of time.

It follows inflationary pressures building faster than expected, notably due to supply constraints in Asia and the outbreak of war in Ukraine.

It is not surprising that buyers have been more cautious in 2022, given that a two percentage point increase in expected interest rates would increase mortgage repayments by almost 25%."

The largest capital cities leading the slowdown

The slowdown has not been evenly distributed across the country, though.

The largest capital cities - Sydney, Melbourne, and Brisbane are leading the slowdown.

Meanwhile, Hobart's price growth has fallen more quickly than in any period, which extends back to 1986.

On the other hand, the smaller capitals Adelaide and Perth have not experienced anywhere near the same reduction in growth this year.

What can we expect moving forward?

The rapid slowdown in price growth signals the housing market is likely to continue to see slow growth over the rest of 2022.

Mr Ryan commented:

"Many buyers and sellers anchor expectations from recent sales momentum, which can embed trends in-market results.

Buyers will also be hesitant to bid as aggressively as we saw last year.

This is predominantly due to the significant uncertainty about how high the mortgage rates will be over the next year.

It is clear the outlook for interest rates will have first-order effects on the housing market over the coming period.

In turn, this will depend on economic indicators – particularly of inflation, growth and wages – and how they are interpreted by the RBA.

It is worth noting major bank forecasters do not expect the RBA to increase interest rates nearly as quickly as financial markets, pegging the official rate closer to 1.5% or 1.75% at the end of the year.

Resolving this uncertainty about the path of interest rates will be the key thing buyers look for over the rest of the year. "

The property market is not going to crash

Even though the markets are slowing down, there is no sign of a crash ahead.

For a property market to "crash" there must be forced sellers and nobody on the other side of the transaction to purchase their properties meaning they have to give away their properties at very significant discounts.

Remember home sellers are also homebuyers – they have to leave somewhere and the only reason that would be forced to sell and give up their home would be if they were not able to keep up their mortgage payments.

This happens when:

1. unemployed levels are high - today anybody who wants a job can get a job
2. mortgage costs (interest rates) zoom up - despite rising interest rates, I only like you to get to where they were a couple of years ago before the pandemic borrowers could cope then

So there’s really no need to lose sleep or worry about the value of your home or investment property in the long term.

And if you're not selling for refinancing in the short-term doesn't really matter if the value of your property drops 5% or so, does it?

Especially if it is appreciated 25 to 30% over the last couple of years.

Don’t get me wrong… I’m not suggesting the value of properties always goes up – far from it.

We're in the correction phase of the property cycle at present and there is no property crash in sight.

Whether it's property, shares, or bitcoins — booms don't last forever, and neither do downturns.

So, think long-term and don’t seek quick wins.

And don’t listen to all those negative messages in the media.

It really doesn’t matter what the markets do in the short term as long as you have sufficient financial buffers to ride out the storm.

And don't let emotions drive your investment decisions, because it’s likely it will take a while for inflation to come under control and then the Reserve Bank will again start lowering interest rates because they always seem to overshoot the mark.

ALSO READ:10 reasons why our property market won’t crash

About Michael Yardney Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and one of Australia's 50 most influential Thought Leaders. His opinions are regularly featured in the media.