How To Pick The Bottom Of The Property Market

Predictions on what's ahead for the property market are always dangerous but an article that appeared in the Australian Financial Review was a really good practical analysis of what may lay ahead.

The article with the headline of "How to pick the bottom of the market" discusses many of the key fundamentals that make up the property market and gives great tips and insights on how to look at the relevant data and draw conclusions.

The full article is our main discussion point last week.

Please see below.

How to pick the bottom of the property market.

With overall property prices having dropped only 6 percent of a predicted 20 percent plunge, there could still be some way to go

The nation’s residential property market is poised on a knife edge as interest rates continue to rise, auction numbers slide more than 40 per cent on last year and prices tumble from record highs.

Economists predict interest rates could peak in the first quarter of next year and begin to fall by August, which will be a signal the housing market is stabilising.

Some postcodes are already posting double-digit losses, but others continue to attract buyers wanting to make the most of less competition and falling prices to bag a bargain.

Shrewd buyers are watching with interest how far rates will rise, readying to pounce when property prices start to bottom.

How much have prices fallen?

Prices across Australia have dropped 6 per cent since the market peak between January and July, with combined capitals down 6.5 per cent and regional cities down nearly 5 per cent, says CoreLogic, which monitors property markets.

Leading economists predict that property prices will eventually fall between 15 and more than 20 per cent.

Sydney’s property prices have slipped about 10 per cent, or around $118,000 on median-priced homes, surrendering less than half of their gains since the COVID-19 trough to the cyclical peak in January, according to CoreLogic.

Melbourne’s property prices, which peaked in February, are down around 6 per cent, or $52,000, which is also less than half the gains over the same period, CoreLogic’s analysis shows.

Brisbane, which peaked in June, is also down 6 per cent, or $48,000.

Greater Adelaide is down 0.6 per cent, or just over $4000 since July, and demand remains strong, according to buyers’ agents. Falls in Darwin and Perth are less than 1 per cent following their respective peaks in August and July.

It’s a similar outcome in regions outside the major capitals where prices peaked around mid-year and falls range from 6 per cent in the remainder of NSW to zero in the rest of South Australia.

What’s the impact of rate rises so far?

The RBA has increased the cash rate every month since May, from 0.1 per cent to 2.85 per cent.

The RBA’s rapid tightening cycle lies at the heart of the fall in home prices, says Gareth Aird, CBA’s head of Australian economics. “Borrowing power has been greatly reduced. For context, the RBA’s 275 basis points of already delivered rate hikes has reduced borrowing capacity by about 20 per cent,” he adds.

An owner-occupier paying the big four banks’ average variable rate on a $1 million principal and interest loan with 25 years remaining will have paid about $36,000, or an extra $11,500, this year following the rate increases, according to RateCity, which monitors rates and fees.

Next year’s total payments will be about $58,000, or an increase of nearly $34,000, if the cash rate rises to 3.85 per cent as predicted by Westpac.

As an example of clipped borrowing power, a family with two children and combined income of $200,000 before tax will be able to borrow $1.1 million – or around $294,000 less than before the RBA cash rate rises, says RateCity.

By next May, if cash rates rise to 3.85 per cent the family’s borrowing will fall to about $1.02 million – around $394,000 less than before the cash rate rises started.

Government analysis shows the value of home lending fell by more than 8 per cent in September, compared to 3 per cent anticipated by economists.

How much further will rates rise?

Economists for the big four banks believe the RBA will continue to raise rates after last Tuesday’s 25 basis point rise to 2.85 per cent.

Both Westpac and ANZ believe it will peak at 3.85 per cent next May. CBA predicts a peak of 3.1 per cent and NAB 3.6 per cent.

As shown in the graphic, the consensus forecast among economists is for the RBA to raise rates for the last time in February, to 3.35 per cent.

Alan Oster, NAB chief economist, who predicts another 25 basis point rise next month, says: “Inflation has continued to escalate over recent months, the labour market remains very tight and consumption has held up better than expected.”

CBA’s Aird, who also expects another 25 basis point rise next month, adds: “It takes time for rate hikes to impact home borrower cash flow and spending. Far more borrowers than usual are on fixed rate mortgages, which blunts the initial impact of rate rises.”

Westpac’s chief economist Bill Evans says: “A central bank that has a 2-3 per cent inflation target and accepts a 4.75 per cent inflation in the following year runs the risk of embedding an inflationary psychology for both business and employees, making it even more difficult to avoid an even more extended period of high inflation.”

When is the property market likely to bottom?

Ben Jarman, chief economist for investment bank JP Morgan, believes it will stabilise by mid-next year, with around 5 per cent downside from the current market.

“In a front-loaded hiking cycle, most of the impact on house prices should happen quite early on, rather than being a particularly drawn-out affair,” Jarman adds.

Tim Lawless, CoreLogic’s research director, says: “We don’t expect housing values to stabilise until rates find a ceiling. The timing of a peak is highly uncertain, but could potentially be as early as late this year or through the first quarter next year.”

Factors that will indicate the market is stabilising include consecutive months when the home value index does not fall, shorter selling times, decreased discounting and increased auction clearance rates, Lawless says.

AMP’s Oliver, who expects prices to have a top-to-bottom fall of between 15 per cent and 20 per cent, says there is a “high risk the pace of decline could re-accelerate next year”.

“There are still more rate hikes to come, and two-thirds of the 40 per cent of households with a mortgage on fixed rates will see their mortgage rate reset from around 2 per cent to around 5 or 6 per cent by the end of next year, resulting in a sharp rise in mortgage stress.”

Further, he points to economic conditions deteriorating next year as weaker global growth and rate hikes lead to slower growth locally and rising unemployment. “The combination will result in a further weakening in home buyer demand and a potential increase in supply as some financially stressed homeowners are forced to sell" he adds.

Oliver says a recovery in prices is likely to require interest rates to start falling, which occurred in the last two recovery cycles starting in 2012 and 2019.

How much more can households bear?

“Consumer resilience so far through the tightening cycle should not be too surprising,” says Aird. Many households have built up substantial savings and there is plenty of pent-up demand after two years of COVID-19 lockdowns, he adds.

NAB’s Oster says consumption continues to hold up better than expected.

But next year’s flood of expiring fixed rate mortgages will dampen household demand.

For example, analysis by AMP reveals the number of workers in severe financial stress has doubled since 2020 and another two million are under moderate stress. One in five workers earning $100,000 and above is also suffering financial stress.

Debt levels in Australia have soared, he adds. “In 1990, there was on average $69 of household debt for every $100 of average household income after tax. Today, it’s $187 of debt for every $100 of after-tax income.”

Oliver says: “Rate rises may not have hit spending much yet, but it will in the months ahead and through to next year. It’s only a matter of time before spending starts to slow.”

Are rate cuts on the cards in the next two years?

CBA is predicting two 25 basis point cuts in August and November next year; Westpac says there will be four 25 basis point cuts in 2024; and ANZ is expecting two 25 basis point cuts in 2024.

NAB expects cash rates to peak at 3.6 per cent next March, and then to fall to 2.85 per cent by mid-2024.

AMP believes the RBA will start cutting by the end of next year or early 2024.