Is The Australian Property Market Going To Crash?

It’s important to understand that while Australian properties are more affordable now than during the pandemic, they are still hugely expensive.

“Australia’s housing market saw a recent peak in April 2022; at that point the market had risen by about 30%,” says Eliza Owen, Head of Research, Australia, at CoreLogic. “We had a stronger upswing in regional Australia where values increased about 40% between late 2020 and early 2022, while in the combined capital cities, the upswing was about 25%.”

Owen says the boom was largely fuelled by the emergency low interest rates during the Covid-19 pandemic that slashed the cost of borrowing, and the strong recovery that followed, with high demand, low unemployment and high levels of accumulated savings.

Maree Kilroy, senior economist at BIS Oxford Economics, says some preference shifts during the pandemic also buoyed the housing market, such as increased demand for holiday houses, tree-changers moving to regional areas, the return of expats, and people wanting more space or their own space following lockdowns.

According to Domain figures, the value of Australia’s housing market fell by -5% across capital cities in 2022. Sydney dropped by -10.9% and Melbourne was down -5.9%. While Canberra and Brisbane house values fell by -6% and -1.1% respectively last year.

Most of the damage was done by the end of spring selling season. According to CoreLogic figures, Australian combined capital city property prices fell 6.5% between their peak in early 2022 and November.

But Owen doesn’t define this as a crash.

“In my mind, a housing market crash is defined by the loss in value and a loss in mortgage serviceability, when you get to a situation where people can no longer service their mortgages, have to sell and when they try to sell, they can’t get enough money to cover the loan,” she says. “That’s not something that we’re seeing in this market.”

Kilroy says that while there is no doubt the property market was in a downturn over the latter half of 2022, a crash is unlikely due to strong economic fundamentals. The first of these is demand, with high rents and the return of overseas migration resulting in more potential buyers. She says that on the supply side, continued low unemployment is limiting the number of properties for sale, with distressed sales not yet evident in the housing market.

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Kilroy says rising interest rates were the key factor underpinning the property market downturn last year. “It is a credit availability issue that is driving this downturn, unlike a rise in unemployment or an oversupply in the market.”

Since it began raising interest rates in May of 2022, the Reserve Bank of Australia has increased rates for ten consecutive meetings, lifting the cash rate to 3.6%—before deciding to hold the rate steady at its April meeting.

Owen adds: “This is the most rapid increase in the cash rate that Australia has seen since the early 1990s, in response to very high levels of inflation. Interest rates are the main thing that have led to this correction in housing values so the key element that drove the housing market upswing has essentially been reversed.”

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As Owen pointed out “prices will continue to fall as long as interest rates are rising”. However, she has noted that the magnitude of the declines started to moderate last last year, with a national fall of 1.6% in August slowing to a fall of 1.2% in October. “Over the past couple of months (of last year), we’ve seen a slowdown in the pace of decline and there’s a bit more of an orderly trend creeping in.”

Then, of course, there was the slight rise in CoreLogic’s dwelling values in March of .6% and .5% for April, indicating that we may have reached the bottom of the falls.

Owen says the best guide for the housing market outlook is the cost of debt, with property prices likely to increase once interest rates start to fall, something Kilroy is expecting in either the last quarter of 2023 or the first quarter of 2024.

However, Kilroy adds that since the boom was fuelled by the unique circumstances of a global pandemic, property prices aren’t expected to bounce back to their previous highs in the short term, as interest rates are unlikely to fall as far. She is forecasting any fall in interest rates to bottom out at around 2.6%.

“We’re expecting a nationwide dwelling peak-to-trough price fall of 11.5%, and we’re expecting that trough to be met in the second half of (2023),” Kilroy says, adding that BIS Oxford Economics forecasts are “at the low end of the scale compared to some commentators”.

However, the same falls will not be experienced universally.

“We’re forecasting a 13% fall for houses and 8% for units, and we’re forecasting Sydney to have the greatest fall in house prices of around 18%, while we have Perth houses at the other end of the scale with a more modest 4% drop.”

While CoreLogic doesn’t make forecasts, Owen says that the Big Four banks are tipping combined capital cities prices to fall by a median of 16%. “Based on the forecasts, this could be one of the largest housing market downturns that we’ve observed, but this is coming off the back of one of the biggest upswings we’ve observed in Australia’s housing market as well.”

However, by late April, ANZ had updated its forecast, downgrading its prediction of a peak-to-trough fall from 16% to 10%. In May, the big four all released revisions of their earlier housing price predictions, reneging their previously pessimistic takes.

Domain economist Dr Nicola Powell said there were signs that the bottom had been reached, and the turnarounds of the banks could be a strong indicator.

“This could very well be the bottom of the market, but we need another couple of quarters of sideways movement of prices, or slight improvements, before that is confirmed,” she said.

Whether this is the bottom or the beginning of another boom is yet to be seen, and, alike to the economists, the banks are split: CBA predicts prices to rise 3% in 2023; NAB expects a slight fall in the year; ANZ and Westpac say the market will be mostly flat for the rest of the year.

Most recently, the IMF released a report, A Rocky Recovery, that ranked Australia second only to Canada in relation to housing risk. It did so after looking at five key metrics:

1. Outstanding housing debt to household income in June last year. Australian housing debt is roughly 145.4%, of the country’s total disposable household income.
2. The share of housing debt on variable interest rates. Around 70% of loans are variable in Australia.
3. The share of home owners with a mortgage—around 37%.
4. Cumulative cash rate changes from March 2020 to September 2022. The RBA has hiked rates 10 times since April last year.
5. Real house price growth between March 2020 to March 2022, which in Australia amounted to a pandemic surge of about 25%.

Commenting on the IMF report, Owen said that while the ranking is sobering, there is reason for optimism.

“Many households have accrued strong savings buffers through the low interest rate period, and labour markets remain extremely tight,” Owen said.

“Housing market conditions are turning a corner amid low stock levels, rising demand from overseas migration, and consumer sentiment shifting higher as we approach what may be the end of the rate-tightening cycle.”

As the IMG said in its report: “In most cases, it is unlikely that an ongoing fall in house prices will lead to a financial crisis, but a sharp drop in house prices could adversely affect the economic outlook.”