Perspective: The Most Rapid Home Price Slowdown In 30 Years

Whilst we have seen property reports coming through from around the country suggesting that the market is transitioning across to a buyers market, it has been our own office data last week that we have needed to focus on and dissect.

For our sellers, the numbers this week are both concerning and confronting. 

It is said that the definition of insanity is doing the same thing over and over again and expecting a different result. Well, the market has changed and we need to adapt.

Interest rates will again rise next month, the banks will further tighten their lending criteria, the remaining buyers will become more conservative and stock levels will rise.

In previous downturns, we have learnt that you have two viable options in a buyers market. We either change the method of sale or we reduce the price.

Every single day a property sits on the market now its value is falling.  

This week's lead story comes to us from realestate.com.au. It discusses the shift in market sentiment and the speed of change that we are seeing.

Please see the article below.

What goes up..? The most rapid home price slowdown in 30 years put in perspective

Property price growth has slowed down quickly in 2022, with the Prop Track Home Price Index showing home prices fell in May – the first decline since the start of the pandemic.

The annual rate of home price growth across the country has slowed from a rapid 24% six months ago to a still-remarkable 14% now. 

But this change is almost unprecedented. Comparing home price changes over six month periods, it is the most rapid slowdown we have experienced since 1989.

Annualised six-month ended price growth in the capital cities was 18 percentage points lower than just six months ago in both April and May this year.

This is a more rapid slowdown than we saw in both 2004 and during the Global Financial Crisis in 2008.

Perhaps this is not surprising – 2021 was the third-fastest period of home price growth in Australia’s history.

But it is not necessarily the case that property price growth falls rapidly after a run-up. In general, the market moves more gradually, indicating there are other factors involved. 

Interest rate expectations have been the key driver of this slowdown. Financial markets expect the Reserve Bank cash rate to be 2.75% at the end of the year.

Six months ago, they expected the cash rate to be around 0.75%.

That is a big shift in a short period of time. It follows inflationary pressures building faster than expected, notably due to supply constraints in Asia and the outbreak of war in Ukraine. 

It is not surprising that buyers have been more cautious in 2022, given that a two percentage point increase in expected interest rates would increase mortgage repayments by almost 25%.  

The slowdown has not been evenly distributed across the country though. The largest cities – Sydney, Melbourne, and Brisbane – have led the slowdown.

By contrast, the smaller capitals of Adelaide and Perth have not experienced anywhere near the same reduction in growth this year. 

The rapid slowdown in price growth signals the housing market is likely to continue to see slow growth over the rest of 2022. Many buyers and sellers anchor expectations from recent sales momentum, which can embed trends in market results.  

Buyers will also be hesitant to bid as aggressively as we saw last year. This is predominantly due to the significant uncertainty about how high mortgage rate will be over the next year.

It is clear the outlook for interest rates will have first-order effects on the housing market over the coming period. In turn, this will depend on economic indicators – particularly of inflation, growth and wages – and how they are interpreted by the RBA.

It is worth noting major bank forecasters do not expect the RBA to increase interest rates nearly as quickly as financial markets, pegging the official rate closer to 1.5% or 1.75% at the end of the year.

Resolving this uncertainty about the path of interest rates will be the key thing buyers look for over the rest of the year. 

Despite the slowdown in price growth, prices are still up 35% nationally since the start of the pandemic. This increase in prices and equity continues to enable many existing owners to upgrade or change locations.

So far, this slowdown has resulted in more balanced conditions for buyers and sellers than the rampant growth seen in 2021, with housing transactions continuing at a solid pace.

No doubt, the slower price growth over 2022 will be welcome for many first-home buyers who have found it challenging to save a deposit during this run-up in prices.