Australia’s property market is now clearly in correction mode, with prices falling faster than anticipated.
The market faces a challenging 12 months ahead as the Reserve Bank continues to raise interest rates, before we see a recovery emerging from 2024.
In Sydney, prices are already down over 7 per cent, and we think there’s another leg to come in this correction. We expect prices to fall 6 per cent nationally this year and a further 8 per cent next year.
The outlook is very much hostage to RBA policy. The cash rate has already been lifted by 1.75 per cent this year and the Bank has signalled there is much more to come. Our forecast is for a further 1.5 percentage points worth of tightening between now and February.
Ultimately, we think the RBA will go too far, and there will be rate cuts in 2024, setting the scene on a recovery in house prices. So, while the downturn is looking a bit more pronounced than we initially thought, and it's coming through more quickly, at least there's some light at the end of the tunnel.
If we delve a bit deeper, there are three clear groups across the country. Well-established price corrections are underway in New South Wales, Victoria and Tasmania, accelerating in the case of Sydney and to a lesser extent Melbourne and other markets.
In the second group, including Queensland, Canberra and some regional parts of the east, we’re just starting to see the beginning of the correction.
The third group has been largely unaffected so far. That’s the South Australia and Western Australia markets which are still managing to eke out price gains. But even in those locations, the writing is on the wall and they will be dipping into correction territory in the months ahead.
It's too soon to talk about buying opportunities - as long as the RBA is raising interest rates, then more price declines are on the way - but those opportunities could start to emerge in 12 months time once the tightening phase is over and markets begin to stabilize.
To take a risk now is a gamble on the inflation outlook being easily brought into line, and at this stage it looks like it's going to be a longer fight to bring inflation back to below 3 per cent.
The main silver lining is that this is a demand-driven correction. It's not being caused by an overhang of supply or distressed sellers. It's more that the higher cost of borrowing has made it more difficult for buyers to stretch to reach the market, or the market price is now correcting to meet them.
There are other positives: most homeowners are still sitting on large net price gains, often 20 per cent or more over the course of the whole cycle. The corrections have tended to be larger in jurisdictions where the price run up was larger. As such, the risks around borrowers falling into negative equity look to be limited.
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