By Ross Stitt*
“The housing market downturn is accelerating, and widening.”
Those are the ominous words in the latest report on Australian house prices released by CoreLogic. Nationally, prices were down 3.4% in the quarter to 31 August; 1.6% in the month of August alone.
The picture is even more dire in Sydney, the bellwether for national prices, where the quarterly decline was 5.9%; 2.3% just in August.
If the decline keeps accelerating, things could get very messy in the Emerald City. Modelling from the investment bank Barrenjoey suggests that if the Reserve Bank of Australia (RBA) continues to raise interest rates in accordance with market expectations, Sydney house prices could fall a remarkable 25% to 30% by next year. And they are not alone in these bleak forecasts.
While declines of this magnitude would only return prices to where they were at the start of the pandemic, that would be cold comfort to the thousands of recent purchasers who would be left with negative equity in their homes and escalating interest payments.  
One interesting aspect of the Sydney price falls is that they are much more pronounced among higher value properties. Houses in the lowest value quartile dropped 2.8% in the August quarter versus a chilling 7.5% in the highest quartile. That translates to thousands of dollars a day for three months for vast sways of Sydney real estate.
This disproportionate decline in higher value residential property is consistent with comments made in a speech on Monday by Jonathan Kearns, Head of Domestic Markets with the RBA. He said that “housing prices in the most expensive areas are the most sensitive to interest rate changes” and the most cyclical.
There’s not much good news here for most first home buyers who tend to be shopping in the lower value quartiles. And any benefit that they are gaining from lower prices are being more than offset by rising mortgage rates. House prices are falling but housing affordability is not improving.
For years, would-be purchasers have prayed for a major downturn in house prices, particularly in Sydney. Their prayers are finally being answered but the concurrent major upturn in mortgage rates leaves them no closer to fulfilling the Australian dream of home ownership.  
According to Barrenjoey Chief Economist Jo Masters, speaking at the AFR Property Summit, mortgage repayments in Sydney now exceed more than 60% of household disposable income. And it will only get worse as the RBA continues to raise interest rates.
CoreLogic has examined how the changing conditions are effecting different buyers. The conclusion is that “demand for housing finance across owner occupiers that are not first homebuyers … appears to be fairly resilient in the rising interest environment”.   
The rest of the market i.e. first home buyers and investors, are “more sensitive to interest rates”.
There’s also great variability on the supply side. The position for existing homeowners depends on when they bought, their level of mortgage financing, and its interest rate terms. The RBA’s Kearns is reasonably sanguine on the grounds that “around 35 per cent of housing credit is fixed-rate debt” and “a large share of variable rate borrowers have been making excess mortgage payments into offset and redraw accounts”.
Some investors will be forced to sell. No doubt many already have, given the ugly combination of rising interest costs and falling prices. The one saving grace for investors is that rents are rising rapidly in some capital cities. According to SQM Research, rents in Sydney rose 3.1% in the last month alone. 
Another factor impacting on supply is development and construction. Figures from the Australian Bureau of Statistics show that the number of residential dwelling approvals fell 17.2% in July. That was driven by a 43.5% slump for units. This is the result of uncertainty about future economic conditions, the difficulty of accessing funding, the upward trajectory of interest rates, and prohibitive construction costs.    
Of course, the problem now is that not enough houses are being built, particularly as migrants and foreign students are returning in numbers. Last month, the Labor government increased the permanent migrant intake by 35,000 in the 2022-23 period. The objective is to ease a chronic skills shortage, but it will also put pressure on housing in Sydney and Melbourne. That will mean upward pressure on rents.     
SQM Research data show that last month the residential vacancy rate nationwide fell to a 16-year low of just 0.9%. In Sydney and Melbourne, it was 1.3% and 1.4% respectively. There’s little capacity to deal with natural population growth, let alone higher immigration. The situation could become acute in 18-24 months when the recent drop off in construction approvals flows through to fewer new developments being completed.  
In the meantime, the key factor is interest rates. The RBA has raised the cash rate five months in a row from 0.1% to 2.35%. In his September statement, RBA Governor Philip Lowe said that the RBA “expects to increase interest rates further over the months ahead” and is committed to doing “what is necessary” to get inflation back within its 2% to 3% target range.
Where will it end? The RBA is widely expected to raise the cash rate by 0.5% to 2.85% at its next meeting in October. Beyond that, opinions differ. Westpac is predicting the RBA will eventually go to 3.6%. ANZ says 3.35%. Either outcome would have a severe impact on the borrowing capacity of would-be buyers and the budgets of existing floating rate mortgagors.
And on house prices.    
The Commonwealth Bank takes a very different view. It predicts rises of 0.25% in October and November to a peak of 2.85% followed by rate cuts in 2023.
Time will tell who’s right.
The RBA’s job of taming inflation would be a lot easier if the federal government exercised a little fiscal restraint. But with large budget deficits as far as the eye can see and voters screaming for ‘cost of living’ assistance, the RBA Governor won’t be holding his breath.
Interest rates, inflation, immigration, consumer confidence, government spending, and international events will all play a role in determining what happens next in Australia’s housing market. The only certainty is uncertainty.
*Ross Stitt is a freelance writer with a PhD in political science. He is a New Zealander based in Sydney. His articles are part of our ‘Understanding Australia‘ series.
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So the property market is collapsing, NZ is following the trend  so much for real estate being a solid investment.
Up to a few years ago it was, but then everyone drank the Kool Aid, and sanity went out the window. Those who have held long-term are fine, but those who jumped in since about 2018 should be a little nervous if they’re planning on getting out now.
Up to a few years ago it was, but then everyone drank the Kool Aid, and sanity went out the window. 
It feels like months. 
Not just the koolaid element…but it seems those in governance who’ve made bank by fixing the market over the last couple of decades have run out of power vs. global factors.
NZ is leading this trend!
..declines of this magnitude would only return prices to where they were at the start of the pandemic…
The problem is we won’t return to the beginning, the damage has already been done by inflation.
As the rates keep hiking, so will the mortgagee sales.
The bubble that a lot of people were talking about is now in progress, feel sorry for the ones who purchased at the beginning of the year, if they had only waited, they could have saved themselves $100k or so, depending.
Agree.  What a s*** show for the FHB who got on with their lives and purchased houses to live in, have babies, raise families.  It’s criminal.  No sympathy for the investors who got themselves leveraged up. 
They still have a house, it’s not like someone’s taken their first born.
Yes but as observed in the US back in 08-09, one just has to pray they don’t lose their job if they find themselves in negative equity while unemployment levels are rising/high. 
This scenario doesn’t make much of a difference whether you bought in the last couple of years, the last 10 years, or not at all.
It is different.  If you bought with a 20% dep 10 years ago, you are likely to have much lower debt than a person who bought with a 20% dep in the last two years.  Chalk and cheese comes to mind.
Absolutely – if you have equity still in your home, with a smaller quantity of debt, and you lose your job (i.e. if you purchased a house 10 years ago), vs the FHB that purchased last year and finds themselves in $100,000+ negative equity with a $700,000 loan, that is a far worse place to be in. And I know who the banks will be getting worried about. Not the person who purchased 10 years ago. 
It’s different, but if you lose your job to the point you have to sell your house because you can’t service your mortgage, I don’t think equity levels are your highest priority.
They’re better off in the USA, there the homeowners can walk away from both the house and the mortgage. In ANZ they’ve still got to pay the mortgage.
Non-recourse mortgages might be a useful addition here. Would motivate banks to be more interested in market fundamentals, you might expect.
Yes, banks taking more interest in market fundamentals might also go some way to support the average USA house price being around USD375k (last time I looked).
we have non recourse loans too Rick, just many don’t realise yet…especially the banks
people can just pack up and leave
good luck chasing the debts in India,China or where else their homeland is
and people can just move to Aussie
many will I suspect
India, China – sure that’s probably out of reach.
Not Aussie, though.  NZ debts are easily and legally (and routinely) enforced in Aus.
Just how do you enforce repayment if they go broke?
How do you chase them if there are thousands in the same boat.
Many will just up and leave and go live in Melbourne or Sydney.
I think you find out why the US has non recourse loans….and thats because when people are broke there is nothing to chase them for.
The ability to fix for a decade at a time like other countries let you do would also bring in a sense of stability, as well as some minimum flexibility around extra repayments.
As each day passes, more holders of mortgage free properties, die. That’s how we’ve constructed the current demographic time bomb for ourselves, and the Western World.
And those properties will go to market, for one reason or another, and will be bought for what any new owner can pay, and that amount is determined predominantly by how much can be borrowed against unencumbered income and existing assets. Neither of those looks to be in a good place, right now. And in an economy where any new cash is important will the, say, 4 beneficiaries of a Will be hanging out for $250k each if $150k will do? The Realisation  Price is less important, in other words.
So as each sale goes through, the price of all other equivalent holdings reflects that.
As mortgage costs rise, disposable income falls and properties continue to flow onto the market, it’s hard to see anything but a continuing downturn for some time to come.
Indeed. Hold for the long term they quote. One should note that every day is one day closer to death so there is a balance required, otherwise you end up like Howard Hughes.
Now the bubble has popped the air will continue escape not sure how many years price’s will go back both here and Australia, only way to recover is to create a bigger bubble but no way will this happen for a long time. Once defaults start happening the house prices crash will accelerate and it’s all set up for banks and cashed up individuals to buy at rock bottom price’s makes you wonder if this was planned get people to take cheap debt then pull the rug out.
Agreed. All the signs were there for a rig pull being imminent.
The opportunity was there for people to lock the cheap debt in for a long period….the ones that did won’t be too worried about whats happening at the moment. In Aug last year you could of got 3.89 for 5 years, if you had taken on a big mortgage then, you would lock that in surely.
3.19% til mid-2026 here. Not fussed at all. it might even still be worth what I paid for it by then.
No problem forecasting a 25 to 30% drop in Sydney, yet Auckland is different?
I get the feeling it’s controlled information flow.  Raise the temperature slowly so the frog doesn’t jump out of the pot.
Auckland is diffrunt and speshul.
Been a long time coming, sit back and watch the house of cards fall
… after the housing gold rush … after the bubble pops & the capital gains vanish in a fart of hot air … after that : 
The debt remains the same ! …. pay up , suckers … 
the banks greed will be the downfall of them
they could have limited the lending when interest rates dropped and not recognised the valuations…….$1.3m for a house in Manurewa?….$1.6 for house in Mt Wellington under a pylon?
but no they had to make the next billion
only thirty years after they last went tits up
What’s the percentage on the banks books re mortgages? And what is the percentage of those are approaching or under stress? And what is the overall value of those mortgages? And what sort of % loss will the banks be selling these places for under mortgagee sales? Can the banks handle that sort of hit? 
Final account….15,000 had moved to interest only due to hardship I believe.This number will grow.
This maybe a big mistake the banks have made.People would have been better to sell down when the house prices were high.
Engineers use quadratic equations to work out optimisation problems like this but perhaps its beyond the pay grade of the bank executives.And it didn’t suit their kpis and bonuses.
Now they have 15000 zombie customers and the list is growing.And things won’t be getting any easier with the numbers, in fact it will be far worse for the bank and the customers.
If someone cant service the mortgage they need to sell the property and rent or buy one they can.
here’s one for ya wiseguy
During 2020-21 interest rate lows. Massive amounts were loaned to many people for what seemed like risk free returns for the banks. If you have a joint income of 200k plus and a million of equity to contribute your 3 million dollar dream home purchase. 40k per year to service a 2 million dollar mortgage. Easy peasy . Plus the house will be worth another 500k in a few years anyway. Now its going to be 100k per year in interest. Not so easy now. Cancel the holiday. No more eating out once a week. Eventually the collapse in household spending knocks on the door of a few corner offices and next minute it’s all on. Not so risk free now
Take Australia, because after 26 years of economic expansion, the country really has very little to show for it.
For over a quarter of a century their economy mostly grew because of dumb luck because their country is relatively large and abundant in natural resources that have been in huge demand from China.
According to the IMF, out of all OECD nations, Australia is the most dependent on China by a huge margin. Over one-third of all merchandise exports from there to China including all physical products and things we dig out of the ground.
Outside of the OECD, Australia ranks just after the Democratic Republic of the Congo, Gambia and the Lao People’s Democratic Republic and just before the Central African Republic, Iran and Liberia. Does anything sound a bit funny about that? because, when it comes down to it, NZ is pretty much economically aligned to Australia as well as China.
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