How the Australian Property Market is Coping with Rising Rates

Australia’s housing market has borne the brunt of ten consecutive interest rate rises. But there are signs that the market could be stabilising (for now).

The Strata Town team recently attended Macquarie Business Banking’s first property webinar of 2023 where NSW Real Estate State Segment Head Stuart Hobden was joined by CoreLogic’s Head of Australian Research Eliza Owen to discuss the market outlook for the 12 months ahead.

These were the seven key takeaways.

1. The current downturn is unprecedented — but context matters

The current cash rate hiking cycle has triggered the largest and fastest decline in Australian property values since CoreLogic started recording data in the 1980s.

“However, the peak-to-trough combined capital cities drop of 8.6% (from May 2022 to January 2023) followed a significant 26% uplift in value between September 2020 and April 2022,” noted Owen.

“When we look back through our historical data, dwelling market downturns have not been as large as the upturns.”

There may be more rate hikes ahead, but CoreLogic’s analysis suggests there could be light at the end of the tunnel for Australian property owners, investors and developers.

2. Not all markets are under pressure

While overall dwelling values declined 8.7% in the 12 months to January 20231, some markets have defied that trend.

“Sydney is leading the price decline with values down 13.9% from the peak in 2022, and Melbourne values are now only 0.5% higher than the onset of the pandemic,” explained Owen.

Other capital cities have been largely spared. Perth and Adelaide have been insulated from interest rate pressure, due in part to their relative affordability. Perth values for example have only fallen about 1% from their 2022 peak.

Lower listing volumes are also helping protect the market from further downward pressure.

“While sales volumes have fallen, listing volumes are relatively subdued as well,” explained Owen. “The number of properties available for sale is about 27% below where it would usually be this time of year.”

Hobden suggested this indicates ongoing strength in mortgage serviceability – a positive signal for financial stability. “Mortgage stress can be hard to measure, as non-performing loans are a lagging indicator. But listings volumes show shifts in the number of people who need to sell,” he observed.

“While there is a fixed rate cliff ahead, RBA data indicates the majority of mortgage debt is on variable terms. Many people have also been overpaying on their mortgages during the low interest rate cycle,” he added.

3. Don’t expect a rapid recovery

Real estate agents hoping for a return to heightened sales activity however may need to wait a little longer.

“When we look at peak-to-trough cycles through the last 20 years of economic shocks, sales volumes have declined around 25% on average. Australia’s annual sales as of January 31 were 19% lower than the peak in December 2021, so we may have a little further to go,” noted Owen.

Improved consumer sentiment would signal demand is returning, but it remains at recessionary lows for now.

Prospective vendors can also take heart from the fact clearance rates have already begun improving in 2023, and lower supply is insulating the loss in demand.

“I’ve been hearing anecdotally that open for inspecting numbers have started growing in 2023, although vendors will need to be realistic about how quickly they can sell, along with the impact of further rate hikes on borrower capacity,” said Hobden.

Historic trends indicate sales volumes may decline further before demand resumes.

4. The RBA remains in play

Where the market goes from here will depend on the RBA and how much further the central bank feels it needs to hike in order to get inflation under control.

On that count, Owen believes ten straight rate hikes are already having an impact.

“I’m somewhat optimistic, because the leading causes of inflation shifted from non-discretionary spending to spending households can actually control in the December quarter. The recent pivot from a 50 basis point hike to 25 basis points (in February and March) is also a strong indication the RBA is getting towards the end of the rate tightening cycle.”

Core inflation excludes food and energy prices, as they are more volatile.

5. Rental yields are a mixed bag

Easing rents could also be a good sign for inflation. CoreLogic’s Capital City Rental Index increased 2.3% last quarter, down from 2.7% in the September quarter. But again, there are significant market variations.

Rental growth remains high, but is beginning to ease.

“In the Sydney market, we’re still hearing that vacancy rates are very low, demand is really high and rents are still increasing,” noted Hobden. “The return of international migration will continue to fuel demand, but given two-thirds of overseas arrivals settle in Sydney and Melbourne, that will concentrate future price rises to those two cities.”

Indeed, Canberra rents actually declined in the past few months, while investor participation continues to trend lower across most capital cities.

“The exception is South Australia,” said Owen. “Investor volumes remain quite strong, because Adelaide investors are seeing strong capital growth and very strong rental yields.”

6. Construction pain is likely to continue

It’s been a tough time for the construction sector, following several years of supply chain issues, labour shortages and significant spikes in material costs.

“Fixed contract terms have created real pain for a lot of builders, particularly as housing takes a long time to deliver,” Owen said. “While we are showing near record highs in detached house construction and an uptick in units, the pipeline of dwelling approvals is starting to slow. And that could create a vacuum in supply once buyers return.”

While growth in the price of steel and timber has eased, it is still considerably higher than pre-pandemic levels – and CoreLogic’s Construction Cost Index now indicates challenges with concrete, cement and sand pricing.

“The growth in the price of construction materials and labour has come down to about 2.5% from a peak of 4.7% in the September 2022 quarter, but prices are still rising,” said Owen.

The HomeBuilder grant construction surge is now easing to average approval levels.

7. There are some positive signals ahead

Prospective homebuyers in South Australia, Western Australia and some parts of Queensland remain in a strong equity position, and that is where Owen sees solid opportunities.

Regional markets have also largely sustained their value growth following the pandemic-fuelled treechange surge. “Regional Australia had a larger upswing – about 40% – and the downswing to date has been much milder,” noted Owen. “That means overall regional home values are around 30% higher than in early 2020. As migration trends normalise, we are still seeing people move from capital cities to the regions, and capital city growth supplemented by overseas migration.”

New data meanwhile shows rising interest rates are beginning to be felt throughout the economy for better or worse. The recent small uptick in unemployment for example suggests a loosening in the labour market, which may help curb inflation, but it also indicates the economy is cooling.

Yet both Owen and Hobden agreed a lot of economic lifting has already been done. “We have never seen a complete unravelling of the Australian housing market – we’ve seen relatively short periods of decline, and relatively long and large periods of recovery,” said Owen. “That may vary across different parts of Australia’s housing market, but it’s important not to underestimate the market’s long-term potential.”

Additional information

1. CoreLogic Home Value Index rate of decline eases despite -1.0% fall in January, CoreLogic, 1 Feb 2023

This material has been prepared by Macquarie Business Banking, a division of Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 (‘Macquarie’). It doesn’t take into account your objectives, financial situation or needs, nor is it intended as a substitute for any accounting, tax or other professional advice, consultation or service – please consider whether it’s right for you.

While Macquarie has taken all reasonable care in producing this information, subsequent changes in circumstances may occur at any time which may impact the accuracy of information. Any graphs and forward-looking forecasts have been included for illustrative purposes only and have been derived from information provided by third parties. Macquarie does not warrant the accuracy of any information provided by any third party.

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