Australian property market fall – Not a crash

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The RBA cash rate hike and other challenges for the Australian housing market

Australia, one of the world’s most expensive housing markets, is facing its biggest challenge in more than 30 years of property market cycles.

Since the Reserve Bank of Australia (RBA) started hiking the cash rate in May, for the first time in 11 years, most housing markets around Australia have seen a growth rate decline.

The RBA rate hikes in May and June have prompted many banks to raise rates on their variable and fixed mortgage loans.

The cash rate is the interest rate on unsecured overnight loans between banks. The rate hike has been prompted by the COVID and Ukraine aftershocks.

Inflation surged to 5.1% in the year to the end of the March quarter on the higher house and petrol prices, with Perth recording the highest of all the capital cities-up 7.6% for the 12 months.

The challenges that the housing market in Australia is facing now are many.

Australian-Property-Market-Fall-Not-a-Crash

1. Surging Interest Rate

Australia’s A$10 trillion housing market is experiencing the sharpest cash rate hikes since 1989. In early May, the RBA lifted Australia’s official cash rate by 25 basis points to 0.35%from 0.1%, to curb rampant inflation, which is playing out in rising food, fuel and energy prices.

In June, it increased interest rates, with a 50-basis-point hike taking the cash rate to 0.85%

This means the rate rise will add $133 a month on loan worth $500,000 over 25 years and $265 a month on loans worth $1 million.

Westpac was the first of the big four banks to announce it was increasing its home loan interest rates following the RBA decision, saying it would lift variable interest rates by 0.50% from June 21.

After June, Westpac believes the RBA will deliver another two 25 basis point increases each in November and December.

The predictions are:

  • This tightening would leave the rate at 2.1% by the end of 2022 — 200 basis points higher than at the beginning of 2022.
  • The tightening cycle will peak at 2.35% following a final hike in February 2023.
  • The cash rate could hit 2.5% by the end of next year.

The RBA’s quarterly economic forecasts assume the cash rate will reach 1.75% in December and 2.5% by the end of 2023.

If this happens

  • A borrower with a $500,000 loan balance could see their monthly repayments rise by $652 a month by Christmas next year.
  • If you have a $1 million mortgage and there are five or six rate hikes from the RBA taking the cash rate to 1.75%, it means you will have to pay an extra $885 per month.
  • If by the end of next year, the cash rate hits 2.5%, it is an extra $1300 per month.


This means that you will have to tighten your home budget, with increased monthly repayments.

CoreLogic Inc. estimated just before the June rate rise that a 200 basis-point increase in variable loan mortgage costs would see monthly repayments climb by A$1,005.

2. Impact on property price

Rising cash rates will be a dampening challenge to the housing market. Buyers begin to seek cheaper homes. The discouraged ones exit the market.

Commonwealth Bank economists have warned that

  • Sydney dwelling prices could fall by 11% this year and 7% in 2023.
  • Melbourne prices would see a similar result.

According to AMP Capital Markets Ltd, Sydney and Melbourne could fall by 20%.

There is potential for steep falls in these markets because the price run-up was more significant, and households in these two cities are more under leverage.

CoreLogic research director Tim Lawless has noted that quarterly growth rates in national dwelling values have been trending downward since their May 2021 peak.

Since then, the Australian housing market has been getting more unaffordable.

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3. Fall of Housing Market

Australian house prices fell for a consecutive second month in June due to the cash rate hikes.

CoreLogic’s national Home Value Index (HVI) recorded a second consecutive month of value declines in June, down -0.6%, to be -0.2% lower over the June quarter.

The national fall in home values was driven by sharp monthly declines in Sydney (down 1.6%) and Melbourne (down 1.1%).

But Adelaide defies the downward trend, with home values rising by 1.3%. In Adelaide, the eastern suburb of Beaumont has had the highest growth in the past 12 months, increasing its median house price by 43.8% to $1,783,745.

Fall-of-Housing-Market

Why is Adelaide strong?

Prices have remained strong in the cities where stock levels/ inventory levels remain the lowest. Adelaide’s advertised stock levels are still 39.5$ below the five-year average.

To help understand the Adelaide phenomenon, let us look at what the inventory level is in the housing market.

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4. Decrease in inventory levels

There has been a decrease in inventory levels in real estate around Australia. Real estate agents explain this is due to backed-up demand caused by extended lockdowns.

Returning ex-pats are creating additional demand, exhausting the inventory levels much quicker than before.

Inventory metric is a significant indicator of the market health in a suburb. The inventory levels measure the number of properties sold over the past 4 quarters divided by the current stock on the market.

This helps agents to calculate buyers’ interest in their listings. It is also an indicator for investors looking to evaluate a housing market.

Decrease-in-inventory-levels

How do we measure the inventory levels?

Suppose we have 50 listings this month and an average monthly sales volume of 25. We would call it a market with 2 months (50 divided by 25) of inventory.

  • Lower inventory levels mean buyers buy more properties than agents put on the housing market. This indicates an active market, where property prices increase as demand exceeds the supply.
  • A higher inventory means fewer homes are sold. This can point to a less competitive market, where properties remain unsold.

In May, the CoreLogic home value index fell for the first time since September 2020, led by declines in Sydney, Melbourne and Australia’s second most expensive property market, Canberra.

The housing boom had already pushed housing affordability to extreme levels. Hence, fresh buyers face a higher debt cost and see less demand in the housing market.

How did the Australian housing market flourish?

Spurred by record-low interest rates and government stimulus, Australia’s housing market has seen astronomical growth. It saw the strongest annual growth on record last year, rising 23.7%.

The market flourished with the RBA slashing rates from 4.75% in November 2010 to 0.1% during the onslaught of the pandemic in November 2020.

According to the Australian Bureau of Statistics’ housing property prices index report, released in March, the total value of the nation’s 10.8m homes grew by $2tn to a record $9.9tn last year.

Highlights of the report

  1. Each capital city recorded price surges, with Hobart (+29.8%), Canberra (+28.8%), Brisbane (+27.8%), Sydney (+26.7%), and Adelaide (+23.9%) all showing the largest annual rises.
  2. Melbourne (+20.0%) had the largest annual rise since the June quarter of 2010, while Perth rose 15.7% and Darwin rose 13.0% throughout the year.
  3. In December 2021, housing property prices rose 4.7%. The strongest quarterly price growth was recorded in Brisbane (+9.6%), followed by Adelaide (+6.8%), Hobart (+6.5%), and Canberra (+6.4%).
  4. The mean price of residential dwellings in Australia was $920,100, up from $876,100 in the September quarter of 2021.
  5. The mean price of residential dwellings in New South Wales rose by $47,700 to $1,207,200 and was the highest in the country.
  6. The second highest mean price was in the Australian Capital Territory ($979,600), followed by Victoria ($956,100). The lowest mean price ($489,000) was in the Northern Territory.

The rise meant real estate value in Australia reached $9.9tn, with the mean price of residential dwellings going up a further $44,000 to hit $920,100 across the country.

It showed house price growth continued to outpace price growth for attached dwellings. House prices rose 27.5% through the year, while prices of attached dwellings rose 14.0%.

New lending commitments for housing rose to a record high value in the December quarter of 2021.

The ABS report came after a report from the National Housing Finance and Investment Corp revealed the average first home buyer is locked out of 70% of the housing market.

First home buyers now need nine years to save a deposit compared to four years in the 1990s.

There was already a housing market crisis

The astronomical price growth was already creating a housing market crisis. When many Australians were locked out of the market, others were staring down a multimillion loan.

Australia’s household debt is amongst the highest in the world. It reached USD 2,082.1 bn in March 2022.

There-was-already-a-housing-market-crisis

There is another risk - building approvals for dwellings will fall further

Housing construction accounts for about 6% of Australia’s A$2.2 trillion economic output and 2% of direct employment.

It remains to be seen how Australian homes, with A$2.1 trillion outstanding mortgage debt, will respond to the crisis.

This is a fall, not a great crash

Still, the national home value index is up 11.2% over the 2021-22 financial year. The confidence of Australia’s biggest lenders stems from the fact that households have built up an additional A$240 billion in savings over the past two years.

The average owner-occupier mortgage is more than two years ahead in repayments and loan arrears are very low.

There are still strong buyer inquiries, particularly at the upper end of the market. Buyers look to capitalize on the fall in price.

RBA Governor Philip Lowe is confident that there is “quite a lot of positive momentum” in the economy which is unlikely to be derailed by “relatively small movements in interest rates.”

The current levels of interest rates remain extraordinarily low. But if the RBA hikes by 40 basis points, that would signal it is worried about inflation levels.

If it is aggressive, like 50 basis points, it would signal the RBA is very depressed.

But the RBA can’t afford to be that aggressive. The last time rate hikes of this magnitude occurred it almost triggered a financial collapse.

Investment bank UBS AG/ Australia expects the RBA hiking cycle to get stopped out earlier than most, and far below market pricing. They think the latter would likely crash the housing market and cause a recession.

What is the government doing?

The election win for the opposition Labor Party in May showed weaker household sentiment.

The Labor party has won the election promising a plan to help lower-income earners get a foot on the property ladder by contributing 40% equity for newly-built homes and 30% for existing dwellings.

But now the government will have to deal with the cash rate too.

In response to high prices in the housing market, the government has been holding an inquiry into housing affordability and supply, which is expected to release its findings this year.

Let’s be confident that it is just a fall, not a crash.

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