The housing market has felt the impact of seven consecutive rate hikes since May 2022. However, with the rate rise peak potentially in sight, are we approaching a return to housing market stability? 

Over 360 business leaders joined Macquarie Business Banking’s Sally O’Connell and CoreLogic’s Research Director Tim Lawless to discuss the state of the housing market during our fourth property update webinar for 2022.

Property underpins a lot of wealth for Australians, accounting for nearly 60% of household wealth, Lawless shared.

“The estimated value of residential real estate in Australia fell to $9.5 trillion from a high of $10 trillion in April 2022. When housing values rise, households feel wealthier, tend to spend more and are much more willing to make investment decisions. However, the opposite is true as well, and that’s what we're seeing at the moment,” Lawless said.

However, there are still upsides for the Australian housing market.

Rate of decline slows, despite continuing rate rises

With seven consecutive rate rises since May 2022, Australia’s interest rates have returned to highs last seen in April 2013 – having an impact on housing values.

“We've seen housing values come down nationally by about 6%, with a lot of variability from region to region and state to state,” Lawless explained.

Sydney’s house prices fell 10.2%, while Melbourne’s declined just over 6% since they peaked in February this year.

The rate of decline is slowing down in markets like Sydney and Melbourne. In Sydney, house prices fell at around 2.3% month-on-month in August, slowing to 1.3% month-on-month by the end of October.

Lawless said it’s important to remember the past two years when examining the market’s recent decline.

“In markets like Brisbane, or Adelaide, we've seen housing values rise by more than 40% through an upswing during COVID-19, over about a 10 to 11-month period. Sydney saw a rise of about 28%. This was a spectacular rate of capital growth.”

Combined, values in capital cities across the country rose 25.5% throughout the upswing.

Part of the reason why housing value has remained above pre-COVID-19 levels is an unusually slow spring selling season. It’s also likely to be a contributing factor to the slowing rate of decline.

“We're seeing the number of new listings coming into the Australian housing market tracking at about 19% below the five-year average and about 25% lower than a year ago. It looks like prospective vendors are delaying the decision to sell until there's a bit more certainty,” Lawless observed.

Low levels of supply is one of the factors helping to keep the housing downturn orderly. 24,664 new listings over the 4 weeks ending 30 Oct, -25.2% below same time last year, -18.6% below 5yr average.

Investors hold out for more certainty, putting upward pressure on rents

Investor lending briefly recovered to average levels throughout 2021. However, despite dramatic rental rises, record low vacancy rates and high demand, investors looking for long-term gains have become less active since interest rates started to rise and housing values began to fall.

“Roughly 80% of rental housing in Australia is owned by private sector investors, a reduction in investment activity implies there’s less supply being introduced to rental markets,” Lawless explained.

Annual rental growth continues well above average and international arrivals could put added pressure on the market.

“And with additional demand coming from net overseas migration flowing directly into the rental market, we are expecting it to remain tight across most of the capitals for some time,” O’Connell shared.

When asked when he expects ‘mum and dad’ investors to return, Lawless said they’ll need to have more incentives before they become active again.

“Once we start to see some certainty return to the growth trajectory, or at least house prices stabilise, that's when we'll start to see investment returning or potentially starting to rise.”

And the catalyst for growth in property prices? An indication that interest rates might start coming down.

“That's when investors will become more active,” Lawless predicted.

Construction industry facing domestic supply challenges

While there is a high volume of dwellings currently under construction – including record detached housing building activity in many regions – there is a lack of projects coming through the pipeline.

“That Home Builder surge in activity, which is geared towards detached houses, still has a long way to go, it seems. Normally a surge in approvals would flow through to completions much more quickly than at the moment,” Lawless observed.

This can be attributed at least partly to the growing supply chain challenges the construction industry is facing – which has transitioned from global issue to domestic pressures.

“We know that the industry is grappling with access to funding, margin pressures, local supply chain issues, labour shortages, and a slowdown of pre-sales for projects – which is often a requirement to get funding,” O’Connell said.

Rising labour, transport and energy costs are creating further pain for construction.

A significant number of houses remain under construction across most states.

Refinancing cliff a risk for 2023

While there’s been little sign of housing distress at this point, rising interest rates are putting pressure on savings buffers. By mid-2023, many households would be coming to the end of their fixed rate period. This refinancing activity will see additional rate rises and cost of living impacts, which may cause difficulty for some households.

“Coming into April-May 2023, we will start to see quite a big surge in refinancing activity, which will be a real test for borrower resilience,” Lawless suggested.

“When you combine this with high non-discretionary inflation, more households will find their mortgage repayments and their essential costs of living much higher than what they budgeted for. That’s where we could potentially start to see some more distress.”

But Lawless is not expecting that to be significant, as long as labour markets stay tight.

“We'll probably find that the net result is a pullback in discretionary expenditure, which will have its own economic implications. But chances are households will spend less around the middle of next year as they focus on debt servicing and funding their essential living expenses.”

Reaching the peak expected to bring stability

When rates are seen to have peaked, it should bring some stability back to the housing market.

“The outlook for the housing market will be very much intertwined with interest rates,” Lawless said.

With the return of international migration, a strong labour market and high rental yields, confidence in the Australian residential real estate market is likely to resume once rates find their ceiling.

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