Economists and Analysts at Odds Over Where They Believe the Market is Heading.

Whilst everyone debates whether or not we are in fact at the top of this housing cycle, one question that is often overlooked is if we are at the top, what happens next?

Corelogic released an article this week discussing exactly this point by focussing on historical data to see what follows a property cycle high point.

The full corelogic article "Peak, peaking, peaked - how to read Australia's housing market" is a great read for any potential seller looking to sell in the near future. As you will see below, if a seller waits to long and misses the peak, it can be several years before they get the chance to achieve a similar price again.

Please see the full article below.

Peak, peaking, peaked - how to read Australia's housing market

Australian housing values grew 22.1% last year and the market is showing signs this extraordinary rate of growth – not seen since the 1980s – is slowing across most of the capital cities.

Yet as the rate of dwelling value appreciation slows, capital city and broad ‘rest of state’ markets are yet to peak, causing plenty of speculation about whether this will occur in 2022 and mark the start of a downturn. 

CoreLogic’s Research Director Tim Lawless explains when a market has peaked, the biggest factors impacting Australia’s housing in 2022 and the trends property watchers should be keeping an eye on this year.

 When to call a peak in housing values

“To categorise a market peak across a region, we would generally be looking for a consistent trend in negative monthly movements,” Mr Lawless says.

“To date, the quarterly trend remains positive across the major regions, with the only exception being Darwin houses, which is the only capital city housing sector to record a negative quarterly change. 

“The Darwin reading can be more volatile than other cities due to the small size of the market, so it may be too early to call a peak in this market even though the quarterly growth rate has turned negative.”
  
Peak vs peak rate of growth

“Although we can’t see any evidence that specific housing markets have peaked, it is clear that most markets have moved through a peak rate of growth,” Mr Lawless says.

“What I mean by that is the point at which markets achieved their biggest monthly growth rate. We saw most of the capitals moved through a peak rate of growth around March last year.”

•    Sydney’s monthly growth rate peaked at 3.7% in March and has since reduced to 0.3%
•    Melbourne’s monthly growth rate peaked at 2.4% in March, reducing to -0.1% in December (the first monthly decline since Oct 2020)
•    Perth’s monthly growth rate peaked at 2.7% in February.  After recording only a single month of decline (-0.1% in Oct 2021) the monthly rate of growth has reaccelerated to reach 0.4% in December
•    Hobart’s monthly growth rate peaked at 3.3% in March and dropped to 1.0% in December
•    Darwin moved through a peak rate of monthly growth in April at 2.7% (0.6% in December)
•    Canberra moved through a monthly peak in March at 2.8% (0.9% in December)

Market exceptions and future expectations

“The only broad regions avoiding a slowdown in the pace of growth in housing values are Brisbane, Adelaide and regional Queensland,” Mr Lawless says.

“These markets are benefitting from a healthier level of affordability compared with the largest capitals along with a positive demographic trend and consistently low advertised stock levels.” 

“We could see our two biggest capital city markets Sydney and Melbourne hit their peak later this year although the timing is highly uncertain and depends on a broad range of influences.”

Three main factors that determine when and if a market peak will occur

“There are a lot of moving parts that will affect the trajectory of housing outcomes,” Mr Lawless says.  

The three biggest factors to impact market movements are: 
•    Policy-related factors such as interest rates and credit availability 
•    Market factors like the trend in advertised stock levels and housing affordability 
•    Economic factors such as labour market conditions and wages growth

“Arguably, the surge in COVID cases associated with the Omicron variant could push some of these policy tightening decisions back, with APRA or the RBA unlikely to tighten their policy settings with so much uncertainty associated with the latest case numbers,” Mr Lawless says.

“There is also some downside risk from a delayed economic recovery associated with less spending activity and heightened uncertainty, although a slower than forecast economic recovery implies rates would stay lower for longer.” 

Key signals that a market is approaching its peak

“Normally, housing growth trends will gradually slow before moving into a correction phase, which is what we are seeing at the moment. However, this isn’t always the case. During periods of shock such as the GFC or early in the pandemic, housing trends turned quite sharply into negative territory,” Mr Lawless says.

Other signs to watch for include:
•    rising advertised stock levels
•    affordability constraints
•    weakening auction clearance rates
•    softening vendor metrics such as longer days on market and larger levels of discounting

“It’s fair to say we are currently seeing a softening in all of these metrics, albeit from an historically high base,” Mr Lawless says.

“We also consider macro factors, which could have an impact on housing demand such as the potential for higher interest rates or tighter credit policies. Both of these factors have a high level of uncertainty at the moment, especially considering the latest wave of COVID cases associated with Omicron which could weigh down economic activity.”

What to expect following a market peak

“Once a market peaks, the typical trend is that values will experience a period of decline,” Mr Lawless says.

“The duration and severity of the decline is dependent on a broad range of both macro and micro factors.”
 
Since the late 1980s, Australia has experienced national downturns that have ranged in severity from a 1.0% peak to trough decline in 2015-16, a temporary correction following the first round of credit tightening via APRA’s 10% speed limit on investment lending, to the most recent 8.4% decline experienced during the 2017-19 downturn.

At a capital city level, the most severe downturns have followed periods of exuberance such as the mining infrastructure boom in Perth and Darwin where housing values in Perth fell by 20.0% over 64 months (moving through a peak in June 2014 and finding a floor in October 2019). 

In Darwin, dwelling values fell 32.7% over 69 months (May 2014 to February 2020), although both downturns were preceded by a spectacular upswing in values.