Many pundits say the market is turning, but others warn reduced borrowing capacity, high-interest rates and soft lending activity will subdue recovery.
Investor Christopher Doyle believes the property market is set to recover after almost a year of price falls and is readying to add to his portfolio of two houses, two apartments and a shared land bank in Melbourne’s western suburbs.
“All the core indicators of a healthy property market are beginning to show after months of falling prices and rising interest rates,” says Doyle, a data strategist who has been investing in property for 20 years.
Investor Christopher Doyle believes now is a good time to buy. Louis Trerise
He believes the likelihood of rates peaking, falling inflation, rising consumer confidence, increased immigration and a shortage of housing will offset the risks of a slowing economy.
But other property specialists are sceptical about the outlook and believe recovery could be slow and painful with more price falls before the market begins to turn.
Ben Jarman, chief economist of investment bank JP Morgan, is more optimistic than the consensus about the market outlook and expects prices will stabilise by mid-year, spurred by the cash rate peaking and some state governments helping first home buyers.
Jarman does not expect this will be a “significant turning point” for the market, particularly if inflationary pressure is not relieved by interest rate cuts.
“Borrowing capacity remains meaningfully lower than pre-pandemic, rate cuts are not imminent, and lending activity remains soft,” he says.
Diana Mousina, AMP Capital’s senior economist, says while the fund manager’s predictions of a 15 per cent - 20 per cent decline could be “too pessimistic”, there will be more challenges and price falls. She expects the market to trough around the third quarter.
Diana Mousina.
Hopes of a market rebound have been spurred by national average home prices rising about 0.6 per cent in March before the Reserve Bank of Australia paused its monetary tightening after 10 successive rate increases.
But guessing property peaks and troughs is risky. These are the trends experts evaluate to assess changing markets.
Interest rates
House prices fall about 80 per cent of the time during periods of rising interest rates, analysis by CoreLogic, which monitors property markets, shows.
“But there are examples where housing values have fallen while interest rates have been stable or falling, and examples where housing values have risen while interest rates have been high, or rising,” says Tim Lawless, research director at CoreLogic.
For example, stable rates did not prevent a downturn from 2017 to mid-2019 after lenders tightened credit availability following the banking royal commission.
Alternatively, housing prices fell at the start of the COVID-19 pandemic in 2020 but bounced back as interest rates were cut to emergency lows, major fiscal support was introduced and affordability improved.
“More recently, there has been stabilisation in house prices despite the fastest rate hiking cycle on record,” adds Lawless.
“It’s looking more likely that we are either at or approaching the peak of the rate hiking cycle, which is likely to instil some renewed confidence in decision-making such as buying or selling a home.
“While I think it’s still too early to call a trough in the cycle, I think it’s fair to say a pause, if not a peak, in the rate hiking cycle is a net positive for housing sector activity.”
Borrowing capacity
Household capacity to borrow is about 27 per cent lower than a year ago, AMP’s Mousina says.
RateCity, which monitors interest rates, says an owner-occupier with a $1 million, 30-year principal and interest variable loan is paying about 5.49 per cent – about 2.28 percentage points more than a buyer in February 2020. That means monthly repayments of around $5668, or $1342 more.
Mousina says: “This limits how much new borrowers can afford, and the expectation of a slowing in economic growth and the rising unemployment rate is not positive for property prices.“
The full impact of RBA rate increases has not been fully reflected in either variable or fixed-rate mortgages given the lags involved and the high proportion of fixed-rate loans.
Christopher Kent, assistant governor of the Reserve Bank of Australia, says the high rate of personal savings and high proportion of fixed interest loans mean it is likely to “take a lot longer than usual” to see the full impact of higher interest rates on household cash flows and spending.
About 590,000 borrowers rolled off fixed rates last year and another 800,000 are set to do so this year.
The RBA has also warned it will further raise rates to beat inflation.
Another useful, but less frequently used, indicator is the number and value of mortgage commitments.
The latest numbers show the value of home lending during February fell about 0.9 per cent, which was the smallest monthly drop since last May, when the RBA began raising rates.
New listings
National residential property listings jumped more than 14 per cent to around 250,000 during March compared to the previous month. This compares with a long-term average of about 300,000, SQM Research shows.
New listings (those less than 30 days) increased by about 7 per cent, while old listings greater than 180 days were up by around 5 per cent.
“Total listings below long-term averages is one of the key reasons why the housing market has not corrected more than feared,” says SQM managing director Louis Christopher.
CoreLogic’s Lawless adds that an increase in properties for sale will be a “real test of the market”.
He says: “Without a commensurate lift in purchasing activity, higher supply could quell this new more positive trend in housing values.”
Market sentiment
“Sentiment needs to improve substantially before getting back to average levels,” says Lawless.
But consumer sentiment jumped more than 9 per cent after the RBA paused its interest rate rises, Westpac says.
Kate Hill, a buyers’ agency at Sydney-based Adviseable, says there has been a sentiment “upswing” recently as prices stopped falling and buyers felt a rates peak was in sight.
“But listings remain extremely low,” Hill says.
There are also big differences in sentiment between capitals, with Brisbane and Adelaide continuing to be buoyant.
“Employment remains resilient, demand for housing is still strong and rates will hopefully stabilise,” says Tim McKibbin, chief executive of the NSW Property Council. “Of course, if rates go up again and uncertainty persists, a continuation of the price easing cycle could play out too.”
Buyers’ agent Kate Bakos says the pause in rate increases and uptick in property prices have boosted buyer sentiment.
“Buyers want to get into the market before everyone else jumps in,” Bakos says.
Duration of downturns
Nicola Powell, chief of research for Domain, says during an average upswing house prices rise about 33 per cent from the trough to peak over two years and nine months.
Downturns on average last for about nine months and prices fall about 3 per cent, which would suggest the market is due for a recovery.
Powell says the message from the past 30 years of price cycles is “to focus on the big picture rather than getting distracted by trying to pick a price peak for selling and a trough for purchasing”.
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