Property prices have now dropped 2.7% from their peak, with more falls likely

Australia’s national property prices fell further again in August as reduced borrowing capacity and fast-rising interest rates continue to weigh on demand.

Across the country, property prices dropped another 0.39% in August to a new $763,000 median, and are now 2.7% below their peak, according to the latest PropTrack Home Price Indicator report.

Prices continued to decline in Sydney (-0.49%) and Melbourne (-0.47%).

While Adelaide and Perth bucked the trend and saw price increases last month, this hasn’t translated through to August.

In fact, the data shows that all capital city markets are now below their price peaks.

Meanwhile, Sydney is the only capital city market to see a decline over the past 12-month period, of -0.9%.

Adelaide, which was the last capital city to record a price fall this year, is now the strongest performing market over the year.

“Higher interest rates – and expectations they will keep increasing – have spread price falls across the country,” REA economist and the report’s author, Paul Ryan said.

"We expect home prices to continue to fall throughout 2022 and into 2023 as reduced borrowing capacities are reflected in prices.

The pace of price falls so far is consistent with our expectation that national prices will be 2% to 5% lower over 2022,” he added.

Largest quarterly price drop in regional markets since 2011

Regional areas weren’t immune from the falls either.

Property prices in the combined regional areas fell 0.34% in August, meaning prices have now dropped 1.2% over the past three months – this is the sharpest quarterly fall since 2011, PropTrack’s report notes.

Regional South Australia is the only market (regional or otherwise) that still sees significant growth, hitting a new price peak.

However, while the decline is noteworthy, Ryan points out that price growth in regional Australia has been stronger than in the capital cities thanks to the sea- and tree-change shift ignited by the pandemic.

Regional areas, therefore, benefited from relative affordability and preference shifts towards lifestyle locations and larger homes following the pandemic.

Over the year, regional markets are up 12.6% versus just 2.7% in capital cities.

Also, despite recent falls, property prices in regional areas are still almost 50% higher than their pre-pandemic levels and capital city prices are up 26%.

Sydney and Melbourne hit hardest by price falls

Australia’s strongest markets, Sydney and Melbourne, are also the markets suffering the largest biggest price falls in August.

Sydney prices are now below their level 12 months ago, while Melbourne prices are unchanged.

From their peaks earlier in the year, prices have fallen 4.8% in Sydney, and 4.3% in Melbourne.

Ryan explains that there is a clear trend across the country that prices are falling the fastest in the most expensive regions with uncertainty about borrowing costs appearing heightened where mortgage sizes are largest.

And this fits in with what we, at Metropole, have also seen in data elsewhere - that Australia’s most expensive suburbs are leading the downturn in prices.

And the same can be said for the housing market versus the market for units.

Some of Australia’s most expensive coastal suburbs along east-coast Australia more than doubled national gains in property prices from the trough to the peak of the COVID-19 pandemic as a sea- and tree-change shift saw buyers flee the city and inner-city areas in search of safe havens and lifestyle suburbs.

But some of those same suburbs which experienced the largest gains amid the pandemic property price surge are now facing double-digit drops as pandemic fears are being replaced by growing concerns about sky-high inflation, the rising cost of living, and falling stock markets.

PropTrack data also shows that house prices fell 0.44% in August, with units down only 0.16% - initially houses were strongly outperforming units as the pandemic saw a demand shift to most space, but house price growth has slowed rapidly this year.

What next for property price growth?

Australia’s national property prices have now fallen for five consecutive months, with the downturn spreading to all capital city markets - and most regional markets.

As we know, interest rate hikes by the Reserve Bank have been the key driver of property price falls and after raising the cash rate at the fastest pace since 1994, further increases are expected throughout the remainder of the year.

Not only have these interest rate increases made borrowing more expensive, but it has also reduced the borrowing capacity of many homebuyers across all regions.

And Ryan warns that the full effect of these interest rate increases will take some time to trickle through to property markets, likely offsetting any positive effect of strong wage growth or increased immigration expected over the next 12 months.

As a result, PropTrack expects property prices to continue to fall throughout 2022 and much of 2023.

“The current pace of price falls is in line with our expectation that prices nationally will fall 2% to 5% over 2022,” Ryan said.

“We continue to see the largest falls in Sydney and Melbourne, and expect the greatest total price falls in these markets.”

And while regional markets, Brisbane and Adelaide aren’t seeing prices drop at the same rate as elsewhere, a reversal of the pandemic-induced preference shifts holding up prices - such as affordability and lifestyle - present a risk for these markets over the longer term.

Meanwhile, Ryan assures that while higher borrowing costs are a strong headwind for prices, the fundamentals of the property market remain sound.

“The Australian economy is performing well, with unemployment at close to a 50-year low.

This will drive stronger wage growth which will increase borrowing capacities.

Increased investor activity, as well as immigration, is likely to boost markets in large cities and units - which are now cheap relative to other property types.”

But remember

The property market is doing what it always does – it’s working its way through the normal property cycle.

Every boom sets us up for the next downturn, just like every downturn sets us up for the next upturn.

Looking back over the last 100 years the downturns have been temporary and the long-term trend for prices of well-located properties has been up.

Currently, I see a window of opportunity for property investors with a long-term focus.

This window of opportunity is not because properties are cheap, however, when you look back in three years’ time the price you would pay for the property today will definitely look cheap.

The opportunity arises because consumer confidence is low and many prospective homebuyers and investors are sitting on the sidelines.

However, I believe later this year many prospective buyers will realise that interest rates are near their peak, inflation will have peaked and the RBA's efforts will bring it under control.

And at that time pent-up demand will be released as greed (FOMO) overtakes fear (FOBE - Fear of buying early), as it always does as the property cycle moves on.

We saw an opportunity like this in late 2018 - early 2019 when fear of the upcoming Federal election stopped buyers from entering the market.

And look what's happened to property prices since then.

Strategic investors will take advantage of the opportunities our property markets will offer over the next couple of years maximising their upsides while protecting their downsides.

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.