Welcome to CoreLogic’s housing market update for June 2023.

Our national measure of home values recorded a third consecutive rise last month, with the pace of growth accelerating sharply to 1.2%. After finding a floor in February, home values nationally have increased 2.3% in the three months to May, following a 9.2% drop. 

Sydney continues to lead the recovery trend, posting a 1.8% lift in values over the month, the largest monthly gain since September 2021. Since moving through a trough in January, home values have risen by 4.8%, or by roughly $48,000 in dollar terms.

Brisbane and Perth were the only other capitals to record a monthly gain of more than 1.0%, however, the rise in values through May was broad-based with the rate of growth accelerating across every capital city.

The positive trend is a symptom of persistently low levels of available housing supply running up against rising housing demand.

Advertised listings trended lower through May with roughly 1,800 fewer capital city homes advertised for sale relative to the end of April. Inventory levels are -15% lower than they were at the same time last year and -24% below the previous five-year average for this time of year.

With such a short supply of available housing stock, buyers are becoming more competitive and there looks to be an element of FOMO creeping back into the market. Amid increased competition, auction clearance rates have trended higher, holding at 70% or above over the past three weeks. For private treaty sales, homes are selling faster and with less vendor discounting. 

The trend in regional housing values has also picked up, with the combined regionals index rising half a percent in May, following a 0.2% and 0.1% rise in March and April.

Although regional home values are trending higher, the rate of gain hasn’t kept pace with the capital cities. Over the past three months, growth in the combined capitals index was more than triple that of the combined regionals at 2.8% and 0.8% respectively.

Although advertised housing supply remains tight across regional Australia, demand from net overseas migration is less substantial. Historically, regional Australia accounts for around 15% of Australia’s net overseas migration. Additionally, a slowdown in internal migration rates across the regions has helped to ease the demand side pressures on housing.

Premium housing markets in Sydney continue to lead the recovery trend. After recording a larger drop in values, Sydney’s most expensive quarter of the market stands out with the highest rate of growth, gaining 5.6% over the past three months compared with a 2.6% rise in more affordable lower quartile values. 

Interestingly buyers targeting the premium sector of the market are still buying at well below peak prices. Although values across more expensive homes are rising more rapidly, at the end of May, dwelling values across Sydney’s upper quartile remained almost 12% below the January 2022 peak. This is the equivalent to a saving of around $213,000 from the cyclical high.

The same can be said for other housing markets. In fact, despite the recent gains most capital city markets are still recording housing values that are well below recent peaks. Perth is the only capital city where dwelling values have returned to record highs. At the other end of the spectrum is Hobart, where values remain the lowest relative to the city’s recent cyclical peak in May last year, down -12.6%.

While advertised supply remains well below average, home sales have shown some subtle upwards movement, with the number of capital city dwelling sales rising over the past three months to the highest level since July last year. While capital city home sales are well below the recent highs recorded in late 2021, they are roughly in line with the previous five-year average, with the number of home sales outstripping new listings in the past three months.

With selling conditions improving, we could see more home owners test the marketplace. The flow of new listings is normally subdued through the winter months, before trending higher into spring. It will be interesting to see if more vendors take advantage of the improving housing market conditions, and look to beat the spring rush when competition to sell could be more intense. 

Now let’s take a look around the capital cities

Sydney moved into a fourth straight month of growth in May, with housing values up 1.8%. Following a sharp 13.8% drop in values between February last year and January this year, home values have increased by 4.8% adding approximately $48,000 to the median value. The number of home sales across Sydney was estimated to be 10% below the five year average over the three months ending May. Meanwhile advertised stock levels were 17% below average, demonstrating a gap between supply and demand levels. With buyers feeling a renewed sense of urgency, auction clearance rates have been holding above 70% through May, reaching 75% over the final week of the month.

Melbourne dwelling values recorded a third consecutive rise in May, taking the market 1.6% above its recent low point in February. The positive trend over the past three months follows a 9.6% drop in values, and despite the recent trend higher, Melbourne home values remain 8.2% below their February 2022 peak. A key factor placing upwards pressure on Melbourne home values is low availably supply. The number of homes advertised for sale across Melbourne was holding 7% below the five year average in May. With demand rising and stock levels tight, selling conditions have also picked up, with auction clearance rates holding around the 70% mark since mid-April.

Following an 11% drop in values from a peak in June last year, Brisbane’s housing market has now recorded three consecutive monthly rises in value. The latest 1.4% lift in values through May takes the recovery trend 1.8 percentage points higher since finding a floor in February. Advertised stock levels remain extremely low, tracking 40% below the previous five year average at the end of May. At the same time, the number of home sales have risen to be 6.1% above the five year average. With supply being outweighed by demand, selling conditions have picked up. Clearance rates held well above average through May while the median number of days on market and vendor discounting rates have also improved.

Adelaide housing values were up 0.9% in May, the second consecutive lift in home values following eight months of decline. With the market up 1.2% since March, Adelaide home values are only slightly off record highs, reflecting only a relatively mild downturn in housing values through the interest hiking cycle to date. Relatively affordable housing prices, especially for interstate buyers, and tight stock levels are key factors supporting the upwards pressure on values. Adelaide’s median dwelling value, at $655,000, is the third most affordable of all the capitals, ahead of Darwin and Perth. 

With a 1.3% rise in housing values through May, Perth’s housing market is back to record highs. Values held reasonably firm through the rate hiking cycle to-date, falling by less than 1% between August and February. Although Perth is the only capital city to stage a nominal recovery, housing values across Australia’s fourth largest capital remain remarkably affordable, with only Darwin showing a lower median dwelling value. Advertised stock levels were 41% below average at the end of May, reflecting extremely low levels of available supply. At the same time, the number of homes sales was estimated to be above average, helping to explain the upwards pressure on housing values.

Hobart home values were up half a percent in May, the first month on month rise in a year. The subtle rise comes after a 13% peak to trough decline. Local values remain 12.6% below their record highs from last year, or in dollar terms Hobart’s median value is about $94,000 lower. Hobart is the only capital city where advertised listings have risen to above average levels, while home sales are trending at below average levels. This imbalance may keep a lid on any material growth in housing values over the coming months. 

After trending lower over seven of the past eight months, Darwin housing values posted a 0.4% rise in May. With only one month of growth and the trend still showing a negative quarterly change, its probably too early to call a bottom in the Darwin market. With 726 sales over the past three months, activity is a little higher than a year ago. At the same time, advertised listings were 3.4% lower than at the same time last year. Jobs growth remains strong across the Territory and unemployment is low. Strong economic conditions coupled with very affordable housing prices sounds like a good recipe for a further rise in home values.

Canberra home values were 0.4% higher in May, breaking a 12 month cycle of falls. Dwelling values were 9.5% below their 2022 peak, equating to a drop of about $83,000. With some signs that values may be rising again, vendor activity has picked up a little. Freshly advertised stock additions were tracking 8.2% above the five year average across the nation’s capital in May and total listings have risen to be 11% higher than a year ago. The lift in advertised stock levels could help to keep buyers and sellers reasonably balanced over the coming months.

With housing values moving through a third month of growth, it is clear the market has moved past a short but sharp downturn. Capital city home values dropped -9.7% in the space of 10 months; not quite the largest drop on record, but it was the sharpest. Since finding a floor in February, capital city home values are up 2.8%, but still -7.1% below their peak in April 2022. 

The recovery trend is looking increasingly entrenched based on the past three months, however, the outlook for housing remains highly uncertain given the possibility of further rate hikes, the potential for higher levels of mortgage stress and persistently low levels of consumer sentiment.

The upwards momentum in housing prices may induce a renewed ‘wealth effect’ – if households are feeling wealthier, they could be inclined to spend more, which is an upside risk for inflation. While trends in housing markets fall well outside of the Reserve Bank’s mandate, as highlighted by the RBA last month, rising asset prices need to be considered with respect to inflation. This trend towards higher housing values could be a factor placing upwards pressure on interest rate decisions.

If interest rates do rise further, it remains uncertain if this would be enough to reverse the positive trend in housing values. While higher interest rates might quell some of the demand side pressures as borrowing capacity and sentiment reduce further, demand from record levels of net overseas migration will remain.

With rental vacancy rates remaining close to record lows and listing numbers well below average, it is hard to see where this additional housing demand will reside without a material and immediate supply response.

Another risk relates to the potential for increased mortgage stress. The coming months will see a sharp rise in the number of fixed rate home loans reaching term. As more borrowers refinance we should get a better understanding of how well borrowers are placed to service their debt at a substantially higher interest rate. 

Helping to offset these risks are tight labour market conditions and a healthy level of household savings accrued.

With labour markets expected to remain tight, the risk of distressed selling should be contained. Despite rising to 3.7% in April, unemployment continues to track around generational lows, well below the pre-COVID decade average of 5.5%. Public and private sector forecasts have the unemployment rate rising, but remaining well below the decade-average benchmark. 

The outlook for housing markets largely rests with the trajectory of interest rates. Economists are divided on the cash rate outlook, highlighting the sheer uncertainty about whether we have moved through a peak in the cash rate or not. Even if the rate hiking cycle is over, the timing of a rate cut also remains highly uncertain. Once interest rates start to reduce, we could see more sustained momentum gather in housing markets.

One certainty is that we will always see a great deal of interest in housing market trends here in Australia. To keep up to date with all the twists and turns, you can tune into the research pages of our web site at corelogic.com.au.

Welcome to CoreLogic’s housing market update for May 2023. It’s looking increasingly likely that Australian housing values have bottomed out, with CoreLogic’s national Home Value Index having posted a second consecutive monthly rise. 

April’s half a percent increase, follows a 0.6% lift in March, leaving the Home Value Index 1.0% higher over the past three months.

It’s becoming more evident the housing market has moved through an inflection point after falling -9.1% between May 2022 and February 2023. Not only are we seeing housing values stabilising or rising across most areas of the country, a number of other indicators are confirming the positive shift. Auction clearance rates are holding slightly above the long run average, sentiment has lifted and home sales are trending around the previous five-year average.

Sydney increased 1.3% in April and is leading the positive turn in housing conditions, with dwelling values rising each month since February. In further evidence that a positive growth trend has emerged, the four largest capital cities all recorded a rise in housing values over the rolling quarter. 

The more positive trend in housing values comes amid a worsening imbalance between supply and demand, with a significant lift in net overseas migration running headlong into a lack of housing supply. While overseas migration would normally have a more direct correlation with rental demand, with vacancy rates holding around 1% in most cities, it’s reasonable to assume more people are fast tracking a purchasing decision simply because they can’t find rental accommodation.

On the supply side, many prospective vendors have stayed on the sidelines through the downturn, keeping inventory at below average levels and providing sellers with some leverage at the negotiation table.

There is also the growing expectation the rate hiking cycle is over, or nearly over, following the most rapid and significant cycle of interest rate hikes on record. A consensus view that interest rates have peaked amid a sharp drop in home values could be contributing to a broader perception that the housing market has bottomed out. If interest rates stabilise from here, there is a good chance consumer sentiment will improve, bolstering housing market activity from both a purchasing and a selling perspective.

Notably, the trend towards more positive housing market conditions has occurred while interest rates remain well above average. The last time we saw housing values trending higher through a rising interest rate environment was during the mid-to-late 2000’s when the mining boom was underway. This period was also characterised by surging net overseas migration that contributed significantly to housing demand.

The trend among regional markets is one of diversity. While values are generally stabilizing or rising in most areas, Regional NSW and Regional Victoria were the only rest of state regions last month to record a fall in housing values. However, the quarterly trend indicates these regions are on a clear trajectory towards a stabilisation in values.

Persistently low levels of advertised supply is a key factor in supporting housing values. The flow of newly listed properties has held below the previous five-year average since September 2022, with the rolling four-week trend holding around -14% below average for this time of the year towards the end of April.

With the flow of new listings holding lower than normal, total advertised inventory was tracking -21.8% below the previous five-year average for this time of the year. Advertised supply was well below average across every capital city over the four weeks ending April 23, apart from Hobart where listing numbers have been rising, albeit from a low base.

The flow of new listings is highly seasonal, typically trending lower through winter before rising into spring and early summer. At the moment it looks like this seasonal trend is holding true, with the flow of new listings once again falling into winter. This will be an important trend to watch. As market conditions improve we could see prospective vendors becoming more willing to test the market and beat the spring rush when competition among vendors is likely to be more apparent.

While listings have trended lower, demand (based on the estimated number of home sales) looks to have stabilised. The rolling six-month trend in capital city home sales is tracking about -28.6% below the recent high, but has held firm through the year-to-date. On a rolling quarterly basis, estimated capital city home sales were approximately -2.4% below the previous five-year average for this time of the year.

If we see a further lift in consumer sentiment there is a good chance housing activity will trend higher. This has certainty been the case historically, where measures of consumer sentiment and the number of dwellings sales have shown a high correlation.

Now let’s take a tour around each of the capital city housing markets.

Sydney’s housing market is once again leading the cycle, posting a third consecutive month-on-month rise, taking housing values 3% off their recent low point. The turn in market conditions follows a 13.8% drop in values. In dollar terms, from peak to trough Sydney home values were down approximately $160,000. Advertised supply levels held well below average through April, finishing the month nearly 17% below the five-year average for this time of the year. Rental conditions also remained extremely tight with the vacancy rate holding at 1.2% over the month, pushing rents to a new record high. 

Housing values across Melbourne posted a second consecutive month of growth in April, although with a lift of just 0.1% over the month, conditions would be better described as a stabilisation in values following a 9.6% downturn. In dollar terms, housing values in Melbourne fell by roughly $79,000 from their peak in March 2022, to what looks to be trough, 12 months later, this March. Advertised supply levels held nearly 7% below the previous five-year average through April, providing vendors with relatively strong selling conditions. The median number of days it takes to sell a property reduced back to 30 days after hitting 42 days in February, discounting rates tightened a little and auction clearance rates ended the month at 71.8% which is a few percentage points above the long run average.

Brisbane home values have posted a subtle rise over the past two months, up 0.3% in April following a 0.1% rise in March. With values nudging higher over the past two months, the rolling quarterly rate of change moved back into positive territory for the first time since July 2022. Advertised supply levels remain extremely low, tracking 39% below the five-year average at the end of April, helping to bring the median selling time down a little to 28 days while discounting rates also reduced back to 3.9%. Rental markets remain extremely tight, with a vacancy rate of just 1.1%, only slightly off a record low of 1.0% recorded in July last year.

Adelaide dwelling values were up 0.2% in April, continuing a run of resilience despite the higher interest rate environment; in fact, Adelaide home values are only 2.4% below their peak in July last year. The market has been supported by persistently low stock levels, with advertised supply ending last month 42% below the five-year average for this time of the year, while sales activity tracked approximately 15% above the five-year average. Rental markets have also held tight, with vacancy rates the lowest of any capital city, recorded at just 0.4% in April.

Perth housing values recorded a 0.6% increase in April, following a 0.5% rise in March and pushing housing values to a new record high over the month. The market continues to be supported by a relatively healthy level of affordability, with the median dwelling value the second lowest of any capital city after Darwin. Advertised supply was also a key factor supporting prices, with listings ending the month almost 40% below the previous five-year average. Rental markets are recording a vacancy rate of just 0.6%, contributing to the largest annual rise in rents of any capital city, up 13.2%.

Hobart home values held firm in April, breaking 10 consecutive months of decline. Home values remain at a cyclical low, down 13% since peaking in May last year. Although the drop in housing values looks to have stabilised, advertised stock levels have shown a substantial rise, albeit from near record lows a year ago. At the end of April, listings were 44% above the five-year average for this time of the year. Higher supply is likely to be factor dampening prospects for price growth at a time when most of the other capital cities are recording a subtle rise in values.

Darwin housing values have recorded a fall in values over six of the past seven months, with the downwards tend in values actually gathering some momentum, bucking the trend seen in the other capitals where home values are generally stable to rising. Although Darwin is Australia’s most affordable capital city and listings are holding at below average levels, we aren’t seeing the same demographic drivers as other markets. The latest population estimates showing a slight fall amid negative interstate migration offsetting a positive overseas migration trend.

Housing values across the ACT flattened out in April, continuing a trend towards stabilisation that has been evident since the trend rate of decline started to ease in October last year. Since peaking in June last year, housing values in the nation’s capital are down 9.5%, taking approximately $88,000 off the median value of a dwelling. Although advertised supply is up 11% on the same time last year, we are still seeing inventory tracking about 7% below average for this time of the year. In good news for renters, vacancy rates have been trending higher since April last year, supporting a mild 0.7% reduction in rents over the past 12 months. 

Overall, it looks like the Australian housing market has moved through what has been a relatively short but sharp downturn. For combined capital city dwelling values, the -9.7% drop from the April 2022 peak to a trough in February 2023 was the second largest on record as well as the steepest decline relative to previous downturns. The -10.2% value decline recorded through 2017-19 is the largest decline since CoreLogic records began in 1980. 

Typically, we wouldn’t see housing values start a new growth cycle until monetary policy started to ease, credit policies loosened or some level of fiscal support was introduced. The shift towards more positive conditions has come about in the absence of these factors.

The key drivers of this positive inflection seem to be the larger than expected rise in net overseas migration which has created additional housing demand at a time of extremely tight rental conditions and well below average levels of advertised supply.

While the bottom of the downturn looks quite convincing, we aren’t expecting housing values to rise materially until interest rates reduce, credit policies ease or housing focused stimulus is introduced, or potentially a combination of these factors. 

This scenario, where interest rates fell and credit policy eased, was exactly what occurred around the middle of 2019 following the Federal election; a drop in interest rates that was shortly followed by an easing in APRA’s serviceability assessment rules. This saw housing values trend higher before being interrupted by the onset of the global pandemic.

While the outlook for housing is looking more positive, it’s important to acknowledge some of the headwinds that are likely to dampen any material momentum building in this upswing.

While interest rates have either peaked or are close to peaking, the cost of debt remains 130 basis points above the pre-COVID decade average against a backdrop of near record levels of household indebtedness. The combination of a high cost of debt and high level of debt, as well as cost of living pressures is likely to keep sentiment at below average levels, at least until interest rates come down.

Although values have fallen, the housing market remains unaffordable for many. Even with a recent sharp drop in values, the median value of a capital city dwelling remains 12.0% or roughly $83,000 higher than it was at the onset of COVID in March 2020. The dwelling value to income ratio was just under 8 at the end of September last year, compared with a ratio of 7.2 at the onset of COVID. Serviceability costs have continued to rise, with approximately 42% of the median capital city household income required to service a new mortgage on the median value home in September last year; a figure expected to rise when updated later this month. 

Additionally, we are yet to see the full impact of the rapid rate hiking cycle flow through to household balance sheets. Arguably the lag of rate hikes hitting the household sector will be longer than normal due to the larger portion of fixed rate borrowers who have, so far, been insulated from rate hikes. As more borrowers feel the impact of higher interest rates it’s likely we will see more evidence of distress, including a rise in mortgage arrears (albeit from record lows) and potentially a lift in motivated listings. 

With labour markets expected to remain tight, the risk of distressed selling should be contained. Unemployment continues to track around generational lows, holding in the mid 3% range since June last year compared with a pre-COVID decade average of 5.5%. Public and private sector forecasts have the unemployment rate rising, but remaining well below the decade average benchmark. 

The outlook for housing markets largely rests with the trajectory of interest rates. The timing of a rate cut remains highly uncertain, however once we see rates coming down, that is when we could see more sustained momentum gather in housing markets. Of course, you can keep up to date with all the housing market twists and turns at the research pages of the CoreLogic web site.

Welcome to CoreLogic’s housing market update for April 2023.

After a six-month period where the downwards trend in housing values consistently lost steam, CoreLogic’s national Home Value Index posted the first month-on-month rise since April 2022, up 0.6% in March.

Dwelling values were higher across the four largest capital cities and most of the broad ‘rest-of-state’ regions, led by a 1.4% gain in Sydney.

Although interest rates are high and there is an expectation the economy will slow through the year, it is clear other factors are now placing upwards pressure on home prices. The rise in values can be put down to a combination of low advertised stock levels, extremely tight rental conditions and additional demand from overseas migration.

Advertised supply has been below average since September last year, with capital city listing numbers ending March almost -20% below the previous five-year average.

Additionally, with rental markets extremely tight, it’s likely we are seeing some spillover from renting into purchasing, although, with mortgage rates so high, not everyone who wants to buy will be able to qualify for a loan. Borrowing power too has been eroded leaving many without enough funds to move from tenant to home buyer.

Similarly, with net overseas migration at record levels and rising, there is a chance more permanent or long-term migrants who can afford to, will skip the rental phase and fast track a home purchase simply because they can’t find rental accommodation.

The lift in housing values has been most evident across the upper quartile of Sydney’s housing market.

House values within the most expensive quarter of Sydney’s market were up 2.0% in March. The same sector of the market recorded a -17.4% fall in values from their peak in January 2022 to a recent low in January 2023, the largest drop from the market peak of any capital city market segment. We may now be seeing some opportunistic buyers coming back into the market where prices have fallen the most.

Regional housing markets have mostly shown firmer housing conditions as well, with the combined regionals index rising 0.2% over the month. The best performing regional markets are quite different to what we were seeing through the recent growth cycle. In today’s market it is mainly rural areas that are seeing the strongest increases in housing values, rather than the commutable coastal and lifestyle markets that were booming through the upswing. However, we are seeing some subtle growth return to regions within commuting distance of the major capitals, after many recorded a sharp drop in values. Again, possibly due to opportunistic buyers or grateful purchasers relishing a lack of competition.

But housing values aren’t rising everywhere. Hobart recorded the largest drop in home values among the capital cities, down -0.9% over the month.

Housing values across the southern most capital have fallen -12.9% since peaking in May last year; overtaking Sydney as the largest cumulative fall from peak across the capital cities. However, the pace of decline has been easing across Hobart over the past three months.

Canberra, Darwin and Adelaide also recorded a decline in values over the month, as did Regional Victoria and Regional Tasmania.

Looking at the housing cycle since the onset of the pandemic, values across every capital city and broad rest-of-state region remain higher relative to where they were in March 2020. Melbourne dwelling values are the closest to pre-COVID levels, with only a 0.6% buffer. At the other extreme is Adelaide where housing values are a stunning 41% above the levels recorded at the onset of COVID, and Regional SA where values remain at a record high, 49% above March 2020 levels.

Rental markets are becoming increasingly diverse but vacancy rates across most areas of the country remain extremely tight. The general trend across the largest capitals is towards an acceleration in rental growth, especially across the unit sector, but slowing growth across the smaller capitals, particularly for houses.

Across each of the capital cities, unit rents are outpacing house rental growth. The quarterly rise in unit rents over the March quarter was at a record high across Sydney and Melbourne.

There is likely to be two factors at play here. With growth in house rents previously much stronger through the worst of the pandemic, it’s likely more and more tenants have no choice but to seek out more affordable options in the medium to high density sector. Additionally, the surge in overseas migrants and students is likely to be funneling demand into inner city areas and precincts close to universities, transport and amenity hubs.

Now let’s take a tour around the each of the capital city housing markets

Sydney recorded a second consecutive monthly rise in housing values through March, surging 1.4% over the month, pushing the quarterly change back into positive territory for the first time since March last year. The rise in values follows a 28% rise in values through the upswing and a 13.8% drop in values from the market peak in January 2022 to what could be the trough in January this year. The largest gains were influenced by Sydney’s upper quartile, where the highest value quarter of the market recorded a 1.3% rise through the March quarter compared with a -0.7% fall across the lower quartile of the market.

Melbourne housing values were up 0.6% in March, the first month on month rise since February last year. The March figures put Melbourne housing values 9.1% below their cyclical peak, comprised of a 10.7% decline in house values and a 5.9% fall in unit values. Advertised supply is continuing to hold at below average levels helping to keep a floor under housing values. At the same time, overseas migration is adding pressure to housing demand, amplified by a lack of available rental stock. This is nowhere more apparent than in Melbourne’s vacancy rate, which dropped to a record low of just 0.7% in March, down from 2% at the same time last year.

Brisbane home values were virtually flat last month, but with a 0.1% change, this was the first monthly rise since June last year. Both house and unit values recorded a modest lift over the month at 0.1% and 0.2%, but unit values have generally held much firmer than houses through the downcycle to-date, down 2.1% since peaking compared with a 12.6% drop in house values. Available supply remains extremely low, with the number of listings in Brisbane tracking 35% below the five-year average at the end of March.

Adelaide housing values have been relatively resilient to falls so far, down 2.4% since peaking in July. Having said that values have softened, albeit only slightly, over the past eight months. Relative to pre-COVID levels, Adelaide housing values remain 41% or about $188,000 above pre-COVID levels. The city is recording the tightest rental vacancy rate of any capital city, at just 0.3%, which has pushed rents 11.5% higher over the past year, equating to an increase of roughly $237 more each month for tenants. Low advertised supply is likely to help keep a floor under Adelaide home values, with listings tracking 39% below the five year average at the end of March.

Perth housing values have been the most resilient to falls of any capital city, with a 0.5% rise in values in March and the market only 0.4% below the recent July peak. The sheer affordability of the Perth housing market helps to explain its resilience, with house values the second lowest of any capital behind Darwin. We are also continuing to see low advertised supply levels which were 36% below average at the end of March. Rental markets are also extremely tight with a vacancy rate of just 0.6%. Such a low vacancy rate has contributed to a 12.8% rise in rents over the past year, the largest increase in rents across the capitals.

Hobart as moved from being one of the strongest capital city housing markets to the weakest in the space of a year. While annual growth over the past decade has been nation leading at 5.9% per annum, the market has responded more negatively than other cities to higher interest rates. Dwelling values are down 12.9% from their peak in May last year, but remain 37.7% higher than they were at the onset of COVID. Adding to softer conditions, advertised stock levels were 43% above the five year average at the end of March. With more stock, the median days on market has risen from a stunningly low seven days to sell in August 2021 to 42 days in March.

Darwin housing values were down 0.4% in March, continuing a run of declines that has been evident over six of the past seven months. Although values have been consistently trending lower, the month on month change has been mild, with a cumulative drop of just 2.0%. Advertised supply is holding relatively tight across Darwin, at nearly 9% below average for this time of the year, which should provide some support for prices. In some relief for renters, Darwin rents are drifting lower, down 1.0% over the March quarter after surging more than any other capital through the worst of the pandemic.

Canberra’s housing values have fallen over 10 of the past 11 months. Although the pace of monthly declines has eased from 1.7% in August last year to half a percent down over each of the past two months, we aren’t seeing the same stabilising or rising trend in values that has become evident across the larger capitals. Similarly, rents are now trending lower across the ACT, down over eight of the past nine months. The weaker rental conditions are mostly being driven by falling house rents, down 0.8% over the past year compared with a 3.2% lift in unit rents over the year.

Although the recent trend in housing markets is looking increasingly positive, we are still cautious about calling a trough in the cycle. Households and the housing sector will still need to contend with an array of headwinds over the coming months:

For starters, the full impact of higher interest rates is yet to flow through to borrowers. While changes to the cash rate impact new lending rates almost immediately, there is typically a several month lag between cash rate movements getting passed on to existing borrowers. Additionally, with around 30% of outstanding housing credit on a fixed interest rate, a substantially larger than normal portion of borrowers are yet to be exposed to the 350 basis points of rate hikes to date.

Although it looks like we are close to the peak in the rate hiking cycle, interest rates are firmly in contractionary territory, and it’s likely economic growth will slow through the middle of the year. If consumer sentiment remains low, we aren’t likely to see a material or sustained improvement in housing market activity.

Additionally, credit isn’t as easy to attain as it was a few years ago. Lending metrics from APRA show a record low portion of home lending is occurring to borrowers with small deposits or with high debt levels relative to their income. Additionally, borrowers are being assessed to repay their mortgage under a scenario where mortgage rates are three percentage points higher, making qualifying for a loan challenging.

There is also the potential for higher advertised supply without a lift in demand. With the flow of new listings holding consistently below average since September, there is likely to be an accumulation of vendors waiting on the side lines. If the number of listings showed a material lift in the absence of a pick up in purchasing activity, we could see some renewed downwards pressure on housing prices. There is no evidence that listings numbers are about to rise, but it’s an important metric to follow.

Of course, there is also a range of more positive factors should help to at least partially offset these headwinds.

Inflation is winding down and a peak in the cash rate is probably around the corner. The monthly inflation indicator has lost a lot of momentum over the first two months of the year, dragging the annual headline reading lower, from 8.4% in December to 6.8% in February, sending a clear signal that inflation is on its way down. There is still a long way to go before inflation drops into the target range of 2-3%, however the lower than expected outcome is an encouraging sign that inflation is being tamed.

Net overseas migration is at record highs and set to rise further, adding pressure to housing demand. Surging migration is a double-edged sword. On one hand, high migration will support economic activity and ease tight labour markets, but on the other hand, the current surge in migration is occurring against a chronic shortage of housing, especially rental housing.

Although unemployment will probably rise through the year, it will do so off generational lows and is expected to hold well below the long run average. With most people gainfully employed, along with widespread positive equity in housing values, it’s unlikely we will see a material rise in mortgage defaults over the year ahead, as long as unemployment holds below average.

The coming months should provide a greater level of clarity about whether we are actually moving through the bottom of what has been a sharp, but short downturn. You can stay up to date with all the key data flows at the research pages of the CoreLogic web site!

Welcome to CoreLogic’s housing market update for March 2023. 

Last month our national Home Value Index recorded a 0.1% decline, the smallest monthly drop since rates started rising in May last year and the first time we saw the monthly pace of decline fall below 1% in seven months.  A subtle 0.3% rise in Sydney dwelling values was the most significant driver of the national deceleration, however, the loss of downwards momentum was broad-based.

The stabilisation in housing values over the month lines up with consistently low advertised supply levels.   The past four weeks have seen the flow of new capital city listings tracking -17.0% lower than a year ago and -11.9% below the previous five-year average.  In fact, this trend towards a below average flow of new listings has been evident since September last year, coinciding with a loss of momentum in the rate of value decline.

Auction clearance rates also bounced back through February, with the capital city weighted average reaching the high 60% range through the second half of the month, while Sydney clearance rates rose to above 70% through the middle of the month, the first time in a year clearance rates have been this high.

Whether this improving trend can be sustained is highly uncertain.  While listings currently remain low, we could see housing demand dented further under higher interest rates and lower sentiment.

Considering the RBA’s move to a more hawkish stance at the February board meeting, along with an expectation for a weaker economic performance and a loosening in labour markets, there is a good chance this reprieve in the housing downturn could be short-lived.  We also have the fixed-rate cliff ahead of us; arguably the full impact of the aggressive rate hiking cycle is yet to play out.

Drilling into the data by value segment, it was the upper quartile of the combined capital city housing market that drove this month’s stabilising trend, increasing by 0.1% in February.  Declines across the lower value segments of the market also stabilised, down just -0.1% across the lower quartile and -0.3% across the broad middle of the market.

Upper quartile housing values have led the downturn to date, dropping -13.5% in value across the combined capital cities over the past 12 months, compared with a 1.7% rise in values across the lower quartile.  Previous cycles have seen a similar trend, where the upper quartile tends to lead both the upswing and the downturn.

Regional dwelling values were down -0.3% in February compared with a -0.1% fall across the combined capital cities.  Since peaking in June last year, the combined regionals index is down -7.7%, compared with a -9.7% drop in the combined capital cities index, which peaked slightly earlier in April 2022.  Regional housing values remain 30.7% above levels recorded at the onset of COVID in March 2020, while the combined capitals index is 10.4% higher.

Dwelling values remain higher than they were at the onset of COVID across every capital city and broad rest-of-state region.  Melbourne now has the smallest value buffer, with housing values only 0.03% above March 2020 levels, followed by Sydney, where dwelling values remain 7.7% higher.  At the other end of the spectrum is Regional SA and Adelaide where housing values surged through the upswing and have remained relatively resilient to value falls through the rate hiking cycle to-date.

While housing value growth has flattened, rental trends have diversified, with the highest rental appreciation now occurring firmly within the unit sector of the three largest capitals, led by a 16.7% jump in Sydney unit rents over the past year.

Although unit rents in the largest cities showed a period of weakness through the early phase of the pandemic, weekly rental values for units are now 19.0% higher than at the onset of COVID in Sydney, 10.4% higher across Melbourne and 23.6% up in Brisbane.

Several factors are likely to be contributing to the surge in unit rents. Rental affordability pressures may be forcing a transition of demand towards higher density rental options (where costs tend to be lower). Additionally, the strong rebound in foreign student and international migrant arrivals would be adding to rental demand, particularly in inner city precincts as well as areas within close proximity to universities and transport hubs.

With vacancy rates remaining around record lows, it is likely rents will continue to rise at least through the rest of the year.

We aren’t seeing much in the way of a rental supply response.  The latest data on private sector investment activity is still trending lower, and new unit commencements continue to fall after holding below the decade average since late 2018.  Additional federal funding for social and community housing isn’t in the budget until 2024, and even then, that will take some time to deliver.

Against this scenario of limited new rental supply, demand looks set to rise further based on the influx of overseas arrivals, amplified by an additional 35,000 permanent migrants relative to prior years.

Now let’s take a look around each of the capital city housing markets.

In a turn of events, Sydney posted a subtle rise in values last month, up 0.3% and the first month-on-month increase since January last year.  Both house and unit values edged up over February, but mostly driven by the upper quartile where value declines have led the downturn.  A shortage of advertised stock is a key factor supporting the improving trend in Sydney home values, with advertised supply tracking almost 12% below the previous five-year average at the end of February.  Although supply is tight, demand has fallen sharply as well, with sales activity over the three months ending February estimated to be 38% down on last year.

After recording a 1.1% drop in values through January, Melbourne housing values were down a smaller 0.4% last month, taking the cumulative decline to -9.6% since the market peaked a year ago.  Houses, as opposed to units, have been leading the downturn, with values down 11.2% and 6.2% respectively since peaking, albeit following a milder increase in unit values through the upswing.  Advertised stock levels were almost 4% below the five-year average at the end of February, providing some support to prices via the short supply.  Melbourne’s dwelling index is only marginally above levels recorded at the onset of COVID in March 2020 and with further value falls expected, there is a good chance we will see the index fall to pre-COVID levels through the first half of March.

Since peaking in June last year, Brisbane housing values are down 11% which is the largest decline on record, at least since CoreLogic started tracking home values in 1980.  The drop in values follows a spectacular 42.7% rise through the upswing and Brisbane home values are still 26% above pre-COVID levels.  A 12.7% drop in house values has been the main driver of Brisbane’s downturn, while unit values have held remarkably firm, falling by only 2.3% since peaking in July last year.  The resilience across the unit sector probably has something to do with unit values only rising at roughly half the amount that house values rose through the upswing.

Adelaide remains a relatively resilient market, with housing values down only 2.3% since peaking in July last year. Although the rate of decline had been accelerating through spring and early summer, the monthly pace of falls has been mild compared with the larger cities where housing is more expensive.  Like most cities, Adelaide’s downturn lost some momentum through February, with values down only 0.2% over the month.  Extremely low advertised stock levels and tight rental conditions are likely to be a key factor insulating Adelaide from larger falls.  Advertised stock levels were 41% below the five-year average in February and vacancy rates were at a stunningly low of 0.3%.

After consistently recording some of the weakest housing conditions in the country prior to the pandemic, Peth is now topping the leagues tables as the most resilient capital city to falling values.  Even though values are down 0.9% from a peak in July last year, the trend is best described as stable, with Perth home values actually 0.2% higher since April last year. The resilience to falls probably has something to do with the sheer affordability of Perth housing, where the median house value is on par with Darwin as the lowest of any capital city.  Other factors keeping Perth values steady are a positive rate of interstate migration, extremely tight rental conditions and a strong economy state-wide.

After recording the highest rate of capital gain over the past decade, Hobart is now one of Australia’s weakest capital city housing markets.  Housing values have dropped by 12.1% from the peak in May last year; the second largest decline from peak after Sydney.  As demand weakens we are seeing supply levels climb. Hobart listings have surged almost 80% higher over the past year, albeit from near record lows.  The rise in available stock has pushed the median selling time to 45 days, up from a median of just nine days a year earlier.

Darwin has recorded a subtle fall in housing values over five of the past six months, taking the market 1.6% below the August 2022 peak.  Although values are trending lower, Darwin has been one of the more resilient housing markets through the rate hiking cycle so far, which is probably a reflection of very affordable housing prices relative to the other capital cities along with lower than average advertised stock levels which was tracking almost 14% below the previous five-year average at the end of February.  House values have been a little weaker than unit values, down 2.0% and 1.2% respectively since peaking. 

ACT housing values fell another half a per cent in February, taking the cumulative decline to 9% since the market peaked in June last year. Canberra dwelling values were down nine of the past 10 months, however the February result was the smallest monthly decline since June last year.  Stock levels remain about 5% below the previous five-year average, which may be a factor supporting a deceleration in the rate of decline.

February’s housing market performance suggested some renewed strength in market conditions, however housing risks remain skewed to the downside and it’s probably too early to call a trough in the cycle considering there are several factors which could trigger a ‘re-acceleration’ of housing value declines over the course of the year.

The past month saw a more ‘hawkish’ shift in messaging from the RBA. The monthly Board minutes revealed a 50-basis point rate hike had been considered for February’s decision. This was due to the perceived risk of persistently high inflation, along with wages and price data exceeding the RBA’s expectations.  Notably, after the February RBA board meeting, wage price data came in lower than market expectations.

With more rate hikes expected over the near term, a further decline in borrowing capacity is on the cards, which is likely to weigh further on home sales. Most forecasters are now expecting the cash rate to peak at 4.1% between May and June. 

The news of more rate rises saw measures of consumer sentiment fall further.  With consumer spirits around recessionary lows, high commitment decisions, such as buying or selling a home, are likely to be delayed for longer.

Serviceability of existing home loans may be challenged this year. Low advertised stock levels are likely to persist as home owners resist selling in a declining market. However, there may be a small portion of prospective vendors who become more motivated or have no choice but to sell their home amid growing challenges to serviceability. These challenges include an ongoing increase in interest rates, more borrowers being exposed to higher rates as the majority of fixed terms end, rising unemployment and a higher cost of living.

Although mortgage arrears rates were moving through record lows last year, the portion of borrowers running behind in their repayments is likely to trend higher through 2023.

Arguably some pent-up supply has accrued while sellers remain on the sidelines. If the flow of new listings increases in the absence of a rise in buyer demand, we could see additional downwards pressure exerted on housing values.

Longer term, the market is poised for recovery. Despite the headwinds accumulating for the housing market in 2023, there is no denying the fundamental under-supply of housing stock. This undersupply is most acute in Australia’s rental market, with the strong return of overseas arrivals adding to aggregate housing demand. At the other end of the equation, approvals data suggests that supply is being constrained by higher interest rates and building costs. With the cash rate expected to stabilise around the middle of the year, and potentially move lower in late 2023 or 2024, there could be a pick-up in buyer demand as certainty improves and confidence lifts.

Clearly factors affecting the housing sector are diverse and likely to become more complex over the coming months as the market navigates more rate hikes, a surge in refinancing activity and weakening economic conditions.  You can keep up to date with all breaking news at corelogic.com.au or via CoreLogic Australia’s LinkedIn page.

Welcome to CoreLogic’s housing market update for February 2023.

The housing market started the year where it left off in 2022, chalking up the ninth consecutive monthly drop in Australian home values.  The national Home Value Index was down -1% over the first month of the year following a larger -1.1% fall in December. 

It looks like we may have moved through the eye of the storm in August last year, when our national index dropped -1.6% in a month.  Since then the national monthly rate of decline has generally eased, however at -1.0% over the month and -3.2% over the rolling quarter, housing values are still falling quite rapidly compared to previous downturns.

The downturn remains geographically broad-based, with every capital city posting a decline in dwelling values through the month, led by Hobart and Brisbane, down -1.7% and -1.4% respectively, while the smallest drops were recorded in Perth and Darwin at -0.3% and -0.1%. 

The most noticeable easing in value falls can be seen across the premium end of the housing market, where the country’s most expensive properties have led both the recent upswing as well as the current downturn.  Across the combined capitals, the rolling quarterly rate of decline in the upper quartile values has improved from a recent low of -6.1% over the September 2022 quarter to -4.0% over the three months to January.

This trend is most apparent in Sydney’s detached house market, where quarterly declines eased from -7.7% in the three months to August, to -3.9% in the three months to January. The improvement could be reflective of more buyers taking advantage of larger price drops across the premium sector, where house values are down -17.4% since peaking in January 2022.

Despite easing rates of internal migration and a partial erosion of the pre-pandemic affordability advantage, regional housing values are holding up better than capital city markets so far.  The milder decline comes after a substantially stronger upswing. Across the combined regional areas of Australia, housing values surged 41.6% higher through the upswing compared with a 25.5% rise in values across the combined capital cities.  Since peaking in June, the combined regionals index is down -7.4%, while capital city values are now -9.6% below their April peak.

This will be an interesting trend to watch over the longer term, but at the moment it seems regional housing markets have seen a structural shift in the underlying demand profile.  With more Australians willing to base themselves outside of the capital cities and remote working remaining a viable option across some sectors of the labour force, it’s unlikely we’ll see a mass exodus from regional markets.

January marked a new record for how much and how fast dwelling values have fallen in Australia.  Based on the monthly index, the national home values are down -8.9% since peaking in April last year, making this the largest and fastest decline in values since at least 1980 when CoreLogic’s records began. 

However, it’s important to understand this downturn in context.  Record declines in home values follow a record upswing, both in magnitude and speed. The national HVI was up a stunning 28.6% in the space of just 19 months prior to the decline.  Despite the recent sharp downswing, values in every capital city and rest-of-state region are still above pre-pandemic levels, although Melbourne’s index would only need to fall a further -0.4% before equaling the March 2020 reading.

Low advertised supply remained a feature of the housing market through January, as the flow of new listings holds well below average for this time of the year.  New capital city listings added to the market over the four weeks ending January 29 were -22.2% lower than over the same period last year and -24.5% below the previous five-year average.  Every capital city recorded a below average number of new listings through January, reflecting an ongoing reluctance from prospective vendors to test the market.

Such a low number of new listings implies most home owners don’t need to sell, rather, they seem to be prepared to wait this downturn out. This trend of lower than normal levels of new listings has been persistent through spring and early summer and looks to be continuing into 2023.

At the same time, housing demand has also fallen away.  Capital city dwelling sales over the past three months were estimated to be -29.4% lower relative to the same period in 2022 and -11.5% below the previous five-year average. 

It’s unlikely listing and purchasing activity will return to average levels until consumer sentiment starts to improve.  There is a strong relationship between consumer attitudes and the number of homes sales. With sentiment remaining around recessionary lows, it’s harder for consumers to make high commitment decisions such as buying or selling a home.

Now let’s take a tour around each of the capital cities.

After posting a -13.8% drop in values over the past year, Sydney’s median dwelling value dropped below $1 million for the first time since March 2021.  So far, Sydney has recorded the largest decline in values of any capital city, but Sydney also peaked the earliest, with values trending lower since January last year.  With values down a further -1.2% in January, the rate of decline has eased from a recent low of -2.3% over the month of August, mostly driven by an improving rate of decline across the upper quartile of the market.  Quarterly declines in Sydney house values eased from -7.7% in the three months to August, to -3.9% in the three months to January.

Melbourne dwelling values were down -1.1% in January taking its peak to trough decline to -9.3%.  Like most cities, house values have fallen further than unit values, down -10.8% and -6.1% from their peaks respectively.  As of January, Melbourne’s index remained only 0.7% above pre-COVID levels and there is a good chance we will see values fall to below March 2020 levels over the coming weeks.  Across Melbourne’s sub-regions, since peaking, the largest drop in values has been a -15.5% fall across the Inner South house market, while at the other end of the spectrum, Inner Melbourne unit values are down the least, falling -4.1% since peaking in May last year.

With a cumulative decline of just over -10.8% since its peak, Brisbane home values have set a new record for the city’s largest and fastest downswing, surpassing the previous record of -10.8% through the 2010-12 downturn.  The falls come after a spectacular 43% rise through the upswing and, despite the swift and substantial drop since June, housing values remain 26.2% above where they were at the onset of the pandemic.  Most of the weakness has been driven by houses rather than units, where values are down -12.3% and -2.3% since peaking respectively.  The good news for home owners is that the rate of decline has been easing since November last year.

Adelaide’s housing market has been relatively resilient to price falls so far. Although January marked the sixth month in a row where dwelling values had fallen, the monthly falls have been substantially milder relative Sydney, Melbourne and Brisbane.  That is starting to change a little though, with the pace of declines accelerating from month-to-month, reaching a -0.8% fall in January.  Despite this, Adelaide stands out by some margin as recording the largest capital gains since the onset of COVID, with dwelling values 41.1% above what they were in March of 2020.

Perth remains one of the most resilient housing markets, with values down only -0.9% since peaking in July last year.  The sheer affordability of Perth housing values, which have risen by just 6.4% in total over the past 15 years, helps to explain why the market has been less impacted by surging interest rates. Tight supply levels and extremely low vacancy rates have also insulated the city.   Perth’s median house value is just $585,300, the lowest of any capital city and about $620,000 lower than Sydney’s median house value.

Hobart housing values are down -10.8% since peaking in May, however they remain almost 38% higher relative to values at the onset of COVID in March 2020.   Hobart stands out as recording the highest capital gains over the past decade, with values up 83%, and over the past 20 years, where values are 217% higher.  As the market weakens, advertised stock levels have risen from record lows to be 32% above the previous five-year average.  At the same time, the median number of days on market has risen from a stunningly low nine days this time last year to 42 days, demonstrating the slowdown in selling conditions.

Darwin housing values have fallen over four of the past five months, however the scale of monthly declines has been small, taking the market only -1.3% below the cyclical high recorded in August.  Australia’s northern most capital remains remarkably affordable, with the second lowest median house value after Perth and the only capital city with a median unit value under $400,000.  It’s also the city with the highest gross rental yields by some margin, reflecting a significant gap between rents and housing values.  Although values have been quite resilient to falls, the longer-term context is that Darwin dwelling values remain -11.2% below their 2014 peak.

The ACT housing market recorded a -1.0% drop in values through January, taking the cumulative decline to -8.6% from the recent peak in June.  House values, which are down -9.9%, have driven the majority of the downturn, with unit values falling by a smaller -4.0% since peaking.  We are seeing this trend of stronger resilience in the unit market across most capital cities, following a weaker performance through the growth phase.  The monthly rate of decline in housing values has been slowing since moving through a peak in August when values were down -1.7% in the month.

Clearly there is a lot happening in the property market.  Even though value falls have generally become less significant, it looks like this downturn still has some way to go. 

The trajectory of housing values remains intrinsically linked with the path of interest rates.  The good news is the cash rate may be approaching a ceiling as speculation mounts that inflation moved through a peak at the end of last year and retail sales fell sharply in December. However, it’s fair to say there remains a substantial range between interest rate forecasters, highlighting the uncertainty about where and when interest rates might eventually land. 

A few clues that inflation may have peaked can be seen in the quarterly CPI numbers. While the trimmed mean remains extremely high, the quarterly growth rate reduced in Q4, due in part to a sharp drop in the housing component of CPI, which carries the largest weight within the CPI ‘basket’. 

We can also see the main driver of inflation has switched from non-discretionary price rises to discretionary.  As the recent spate of rate hikes eventually dampens consumer demand we are likely to see a pull back on discretionary spending, helping to push inflation lower.

Once interest rates move through a peak, it’s likely that housing values will gradually stabilise, however there will need to be a spark to ignite another growth cycle.  The most obvious stimulus would come from a drop in interest rates, but any cut to the cash rate probably won’t occur until late this year at the earliest. 

Other factors that could support housing activity would be a rise in consumer sentiment, an easing in credit policy, such as a reduction to APRA’s serviceability buffer, or fiscal incentives aimed at stimulating housing demand.

Some downside risk from the large number of fixed rate mortgages due to expire later this year remains. Around two thirds of fixed rate home loans, which comprise a substantially larger portion of the loan book than historically normal, will expire in 2023, with many moving from interest rates around 2% to a rate closer to 6%.

It’s likely mortgage arrears will rise from last year’s record lows, but the risk of a material increase in mortgage arrears or defaults should be minimised as long as labour markets remain tight.  Although labour markets are expected to loosen throughout 2023, it’s unlikely the unemployment rate will rise above long-term average levels.

Advertised stock levels will be a key metric to keep an eye on. Inventory levels remain well below average, mostly due to persistently low levels of fresh stock coming on the market.  Such low advertised supply has arguably helped to keep a lid on value declines, but a lift in supply without a commensurate rise in demand could prolong the downturn.

With overseas migration accelerating, especially among foreign students, rental vacancies are likely to remain extremely tight in some markets, leading to further upwards pressure on rents. The rental market is already imbalanced, with vacancy rates holding around record lows.  At the same time there is little evidence of additional rental supply coming to market.  The net outcome is likely to be a further lift in rents and a worsening in social issues associated with unaffordable accommodation costs.

With so much happening and some important policy decision coming up, you can stay in touch with the latest housing market trends at the research pages of corelogic.com.au or on the CoreLogic Australia LinkedIn page.

Welcome to CoreLogic’s housing market update for December 2022

CoreLogic’s national Home Value Index moved through a seventh month of decline last month with values dropping -1.0%. That takes values -7.0%, or approximately -$53,400, below April’s peak. The decline comes after national housing values surged almost 29% through the recent upswing, adding roughly $171,000 to the value of the average dwelling.

In good news for home owners, although values are continuing to trend lower, the rate of decline has been consistently moderating since the national index dropped by -1.6% in August.

The easing in the rate of decline is mostly emanating from Sydney and Melbourne, but is also evident across many of the smaller capitals and most regional markets. Three months ago, Sydney housing values were falling at the monthly rate of -2.3%. That has now reduced by a full percentage point to a decline of -1.3% in November. In July, Melbourne home values were down -1.5% over the month, with the monthly decline almost halving last month to -0.8%. 

The rate of decline has also eased across the ACT, and is no longer accelerating in Brisbane. Most of the broad rest-of-state markets have also seen the pace of declines decelerate.

Potentially we are seeing the initial uncertainty around buying in a higher interest rate environment wearing off, while persistently low advertised stock levels have also contributed to this trend towards smaller value falls. However, it’s fair to say housing risk remains skewed to the downside while interest rates are still rising and household balance sheets become more thinly stretched.

There is still the possibility the pace of declines could reaccelerate, especially if the current rate hiking cycle persists longer than expected. Next year will be a particular test of serviceability and housing market stability, as the surge in fixed rate loans secured in 2020 and 2021 start to expire.

Across the broad housing types, unit markets have continued a run of relative resilience. In November, capital city unit values were down -0.6%, while house values declined at twice the pace with a -1.2% drop. This trend has been seen throughout the downturn to-date, with capital city unit values down -4.7% from the recent peak, while house values are down -8.4%.

Every capital city except Hobart is recording a more resilient outcome for unit values relative to houses. This trend can at least partially be attributed to the more moderate gains recorded during the upswing, but probably also reflects the unit sector’s more affordable price point at a time when borrowing capacity has reduced.

Sydney remains the only city where housing values have fallen by more than -10% from their peak. Through the upswing, Sydney values increased by 27.7% before topping out in January. Despite the sharp -11.4% fall in values through the downturn to-date, Sydney home values remain 10.3% above pre-COVID levels at March 2020. 

Due to a weaker upswing, Melbourne values are only 2.8% above where they were at the onset of COVID. 

Most of the other capital cities and broad rest-of-state regions are still recording dwelling values at least 25% above March 2020 levels.

The trend in new listings added to the housing market drifted higher through November, however this year’s spring listing season has been mild. Over the four weeks ending November 27, the flow of new capital city listings was about -31% lower than a year ago and -14% below the previous five-year average. 

The lower than normal number of new listings coming onto the market has helped to keep total advertised stock below average as well. Across the capitals, total listings haven’t been this low at this time of the year since 2010, and regional listings are at their lowest level since 2007. Such low stock levels are likely a key factor offsetting the negative impact of higher interest rates and low consumer sentiment.

While advertised supply levels are lower than normal, so too is housing demand. Capital city home sales were estimated to be -23% lower than a year ago and almost -2% below the previous five-year average over the three months to November.

Given the trend in new listings has recently moved through a seasonal peak, we are likely to see activity from both a listing and buying perspective record a sharper decline around the middle of December through to late January as the festive season disrupts the home buying and selling process.

Now let’s check out the housing trends in each capital city.

After recording a 27.7% rise in housing values between October 2020 and January 2022, Sydney home values are down -11.4% since peaking, taking roughly $132,000 off the median value of a dwelling. Larger declines have been evident for houses, with values down -12.6%, while unit values have fallen by a smaller -8.3% after recording a milder upswing as well. We are also seeing larger falls across the upper quartile of the market, with upper quartile house values down -15.1% from the peak compared with a -9.1% drop across lower quartile house values. Housing transaction activity has also fallen relatively sharply, with home sales over the three months to November down -39% relative to the same time last year.

Melbourne housing values have fallen through 10 of the past 12 months, taking the cumulative decline to -7.1%. With a -0.8% drop in values in November, the rate of decline has been easing since a -1.5% monthly drop in July. At the end of November, Melbourne dwelling values were only 2.8% above March 2020 levels coinciding with the onset of COVID. If the current rate of decline persists, we could see Melbourne housing values back to pre-COVID levels by March next year. Home sales over the past three months were estimated to be about a third lower than at the same time last year, reflecting less demand, but advertised supply has also trended lower, down about -12% relative to last year.

Brisbane housing values were down a further -2% in November, on par with Hobart as the largest monthly decline and consistent with October. Since peaking in June, Brisbane home values have dropped by -8.1%, the second largest fall from peak after Sydney where values are down -11.1% since peaking in January. Reflecting the enormity of the recent upswing, Brisbane housing values remain 30.4% above pre-COVID levels. Home sales have reduced by about -18% relative to last year, but remained 14% above the five-year average over the past three months. Advertised stock levels are also lower, tracking one third below the five-year average in November. 

Adelaide remains one of the most resilient markets to a downturn, with housing values slipping only -0.3% in November to be -0.9% below their July peak. Home sales have also bucked the weakening trend, with sales over the past three months estimated to be almost 12% higher than a year ago. Relatively affordable housing prices are likely to be a factor in supporting housing demand, with Adelaide’s median house value $541,000 lower than Sydney’s and $213,000 lower than Melbourne’s. Similar to other cities, Adelaide’s unit market is recording stronger performance, with unit values remaining at record highs in November, while house values have dropped -1.4% the July peak.

Perth housing values were stable in November, breaking a three-month trend where values were edging lower. Along with Darwin, Perth was the only capital city to avoid a decline in values through the month. The number of home sales also held firm relative to last year, bucking the broader trend towards less transaction activity across the larger capitals. The resilience of the Perth market can be attributed to the relative affordability of housing, along with strong local economic conditions, tight labour markets and positive migration rates. Perth is recording the lowest median house value of any capital city and second lowest median unit value after Darwin.

After consistently being one of the nation’s strongest capital city housing markets, Hobart’s home values are now falling at the equal fastest pace, alongside Brisbane, with values down -2% in November. The decline comes as advertised stock levels adjust higher to be 18% above the five-year average in November, while at the same time, demand for housing reduces. Sales activity over the past three months was estimated to be -14% below levels a year ago. Hobart is also the only capital city where unit values are falling faster than house values, however this follows a more substantial upswing in values across the unit sector during the recent growth phase.

Darwin was the only capital city to record a rise in housing values last month, up 0.2% in November. The rise was driven by a 1.2% gain across the more volatile unit sector, while house values were down -0.3% over the month. Although housing values are generally trending lower, the pace of decline has been mild and the volume of home sales remains higher than a year ago and substantially above the five-year average. With the lowest median house value and second lowest median unit value across the capitals, Darwin remains one of the most affordable markets to purchase a house or unit.

Canberra home values were down a further -1.2% in November taking the market -6.5% below the June 2022 peak. Falls have been steep for houses, where values are down -7.5% from the recent peak while unit values are down a smaller -3.2%. Although values are falling, demand looks to be holding up reasonably well, with sales over the past three months roughly in line with the same time last year and 15% above the five-year average.

The outlook for the housing market remains skewed to the downside with an expectation for further falls in home values, at least until interest rates find a ceiling. 

The trajectory of interest rates is the most important factor for housing market conditions. The RBA has settled into a more moderate cadence of rate hikes, moving from 50 basis point increases in the cash rate to 25 basis points in October and November. Although the RBA could revert back to a more aggressive policy stance, there is a good chance Australian interest rates will peak in the first half of 2023, if not in the first quarter.

A cash rate of 3.1% takes the rate hiking cycle 300 basis points higher than the emergency lows recorded before the tightening cycle began on May 3rd. Importantly, this takes interest rates to the limit of mortgage serviceability assessments recent borrowers were tested on. To-date, bank reporting shows mortgage arrears have held around record lows, but 90-day arrears rates are likely to rise over time given the higher interest rate setting and elevated inflation against a backdrop of record levels of household indebtedness. If interest rates move materially beyond 3.1%, it is reasonable to expect a more substantial rise in mortgage distress, especially when considering the high cost of living pressures.

A lift in fixed mortgage rate refinancing activity from the second quarter of next year adds to the downside risk of higher mortgage distress. The RBA recently estimated around 35% of outstanding housing credit was on fixed term rates, which is higher than the historic average of around 20%. Further, the RBA expects about two thirds of these loan terms will expire by the end of 2023, with borrowers facing a three to four percentage point rise in their mortgage rate.

While mortgage arrears are likely to progressively rise from record lows, the risk of a material lift in defaults remains small. 

Tight labour markets will be the key safety net helping to keep a lid on defaults. The unemployment rate, recorded at a generational low of 3.4% in October, is set to rise into 2023, but not to above average levels. Forecasts from Treasury and the RBA, along with the private sector, generally put unemployment around the mid-4% range in 2024, which is still well below the 10-year average of 5.5%. 

Household savings and a history of higher than required mortgage repayments should also provide a buffer to higher mortgage rates and cost of living pressures. The RBA recently noted the median variable mortgage rate borrower had enough in their offset/redraw accounts to cover 20 months of mortgage repayments (as at August).

Persistently low inventory is helping to balance out the slump in housing demand. With advertised stock levels well below average across most markets, there is no evidence of an oversupply of homes available to purchase. A rise in advertised stock levels would be a warning sign for a reacceleration in the downturn, but this is looking unlikely, at least in the near term. 

As housing values trend lower and incomes rise, some measures of housing affordability are easing. Across the combined capitals, the median dwelling value to income ratio reduced from 8.4 in the March quarter to 7.9 in Q3. The number of years estimated to save a 20% deposit also trended lower, from 11.1 in March to 10.6 in September. An improvement in these metrics implies lower barriers to entry for first home buyers. 

The flipside to lower affordability barriers is worsening serviceability. The portion of household income required to service a new mortgage was already rising before interest rates moved from record lows. With interest rates trending higher, the portion of median household income required to service a variable rate mortgage is back to the highest level since Q3 2008 when the cash rate was 7.0%.

Well that’s a wrap for 2022. Our next monthly video update will be released in February next year, however our December Home Value Index will be released on our website on Tuesday January 4. 

Thanks for tuning into all the property market twists and turns through the year. In the meantime, you can check out the research page at corelogic.com.au for the latest news and insights. On behalf of CoreLogic, have a safe and fun festive season.

Welcome to CoreLogic’s housing market update for November 2022

CoreLogic’s national home value index moved through its sixth month of decline last month, with values down a further 1.2%, taking the cumulative drop from the market peak to 6.0%.  The geographic scope of Australia’s housing downturn broadened through October with every capital city and rest-of-state region, apart from regional South Australia, recording a drop in housing values last month.  

Across the capital cities the month-on-month decline ranged from a -2.0% fall in Brisbane to Perth where dwelling values nudged only -0.2% lower.  Across the rest-of-state regions, monthly falls of more than -1% were recorded across New South Wales, Victoria and Queensland.

Although more regions are recording a fall in housing values, the rate of declines remain diverse.  The pace of falls has eased over the past two months across Sydney and past three months in Melbourne but has gathered momentum in Brisbane where home values are now falling the most rapidly of any capital city or rest-of-state region.  The changing dynamic across the largest cities has seen the rate of decline across the combined capitals index ease from a -1.6% drop in August to -1.4% in September and -1.2% in October.

Despite the easing in the pace of decline, it’s probably still too early to claim the worst of the decline phase is over.  Australian borrowers are facing the double whammy of further interest rate hikes along with persistently high and rising inflation, so there is a genuine risk we could see the rate of decline re-accelerate as interest rates rise further and household balance sheets become more thinly stretched.

To-date, the housing downturn has remained orderly, at least in the context of the significant upswing in values. This is supported by a below-average flow of new listings that is keeping overall inventory levels contained. There’s also tight labour market conditions, an accrual of borrower savings and a larger than normal cohort of fixed interest rate borrowers, who have so far been insulated from the rapid rise in interest rates.

Housing values across most of the broad regions remain well above pre-COVID levels, implying most home owners remain in a positive valuation position relative to their purchase price.

Focussing on the spring trend in advertised listings, the flow of new listings started to trend higher in October, but the traditional spring selling season remains well below levels at the same time last year and relative to the previous five-year average.  Over the four weeks ending October 30^th, the number of newly listed capital city dwellings was tracking -25.2% below a year ago and almost -19% below the previous five-year average.

The low number of freshly advertised properties is probably helping to contain price falls to some extent. So far, we haven’t seen any evidence of panicked selling or forced sales.

On the demand side, the estimated number of home sales has held reasonably firm through the first two months of spring.  Based on modelled sales over the three months ending October, capital city home sales were approximately -17% lower than a year ago and 4% above the previous five-year average for this time of the year.

The number of home sales is well down from the highs of late last year, however the fact that sales activity is still above the five-year average over the past three months reflects a base level of demand remains for housing.

Focusing on the trends across each of the capital cities continues to highlight the diversity across the housing market.

The rate of decline in Sydney home values eased further in October.  After housing values fell by -2.3% in August, the pace of falls reduced to -1.8% in September and most recently -1.3% in October.  Although the rate of decline has eased, we are still expecting Sydney home values to reduce over the coming months as interest rates rise.  The easing in the rate of decline has been most apparent across the upper quartile of the market, where the quarterly rate of decline has reduced from -7.5% in August to -6.2% in October.  This is also the sector where housing values have fallen the most significantly from their recent peak, down 13.5% compared with a smaller 4.9% drop in values across the lower quartile of the market.

Housing values were down 0.8% across Melbourne in October, the eighth consecutive month on month decline, but the smallest monthly drop since May.  The rate of decline has been easing over the past three months, but its likely that housing values will continue to trend lower while interest rates trend higher.  The easing in the rate of decline can be seen across the upper quartile of the market, where the quarterly drop in values has lifted from a recent low of -5.0% in August to -3.6% in October.  Since peaking February, Melbourne housing values are down 6.4%, leaving the market only 3.6% above pre-COVID levels.

With a 2.0% fall in dwelling values through October, Brisbane recorded the largest monthly decline of any capital city or broad rest of state region.  Since values peaked in June, the market is down 6.2%, or in dollar terms, down about $48,300.  The decline comes after a dramatic run up, where values increased by almost 43% during the growth phase.  Brisbane’s unit market is recording a substantially milder decline, with values down 1.2% since peaking, compared with a 7.2% drop in house values.  While values are falling, rents are surging.  House rents are up 13.6% over the past year and unit rents are up 13.1%.

The decline in Adelaide home values has been mild to date, with values slipping 0.3% lower in October to be 0.6% down from their July peak.  Adelaide has recorded the most significant rise in values across the capital cities, with the dwelling index up 44.7% through the growth phase, adding approximately $203,200 to the median dwelling value.  One factor helping to keep a floor under Adelaide home values is the shortage of advertised supply, which was tracking 43% below the five year average at the end of October. Adelaide is also showing the tightest rental market conditions, with a vacancy rate of just 0.3%, which is likely to keep upwards pressure on rents for the foreseeable future.

Perth housing values continued to move through what has been a relatively mild downturn to-date. Dwelling values were 0.2% lower in October, which was the smallest decline across the capitals, and since peaking in July, the local market is only 0.7% lower in value.  Demand seems to be holding up despite higher interest rates, with our estimate of home sales over the past three months tracking 10% higher than a year ago, while total listings are down 14% on last year and trending lower.  Rental markets remain extremely tight, with a vacancy rate of just 0.6% that is likely to keep upwards pressure on rents.

The rate of decline in Hobart housing values has eased over the past few months, but values are still falling by more than 1% month on month to be down 5.7% since the market peaked in May.  The decline comes after a solid period of growth, where Hobart home values surged 37.7% higher through the recent growth phase.  Amid higher interest rates and less demand, Hobart listings have risen substantially, up 69% compared with last year, but still well below the highs of 2012 to 2015 when total listing were more than double what they are now.

Darwin housing values dropped 0.8% in October, the first month on month decline since the rate hiking cycle commenced.  The decline comes after a 31.1% rise in home values, but that hasn’t been enough to take values to a new record high, with Darwin house values still 4.1% below their 2014 peak and unit values 26.3% below the 2010 peak.  Housing activity is continuing to track higher than a year ago, and was 67% above the five year average for this time of the year, reflecting a relatively low base in sales activity through the early part of the five year average.

Canberra housing values have declined over five of the past six months, taking values 5.4% below their monthly peak in June.  Although values are consistently falling from month to month, the rate of decline has lost some momentum since recording a 1.7% drop in August, which has since reduced to a 1.0% fall in October.  Along with lower values, the number of home sales has also reduced.  Home sales over the past three months where 8.8% lower than at the same time last year.  With less demand, the number of listings available across the Canberra market has trended higher to be almost 25% higher than this time last year.

Overall, with interest rates likely to rise further, we are expecting housing values are likely to continue trending lower.  The bad news for home owners is most economists have recently revised their cash rate forecasts upwards due to higher than expected inflation outcomes.  Mainstream forecasts for the terminal cash rate range from 3.1% to 3.85%, while financial markets are pricing in a peak cash rate closer to 4%.

At the low end of these forecasts, a 3.1% cash rate implies an average variable owner occupier mortgage rate of around 5.41% for new borrowers and 5.86% for existing borrowers, adding approximately $1,290 to $1,500 a month to mortgage repayments relative to pre-rate hike mortgage costs on a $750,000 principal and interest loan on a 30-year term.

Since the rate hiking cycle commenced in May the cash rate is up 275 basis points.  Considering mortgage serviceability tests assess a borrower’s ability to repay a mortgage at 300 basis points higher than the origination rate, it will not be long before these serviceability limits are tested.

Although housing risks remain skewed to the downside, there are a few tailwinds that should help to keep this downturn orderly and stave off a material rise in distressed listings.

Tight labour markets are a key factor in keeping borrowers on track with their mortgage repayments.  The RBA has previously hypothesised that a substantial lift in mortgage defaults would be dependent on a ‘double trigger’ – a combination of negative equity and an inability to pay the loan.  With housing values down only -6.0% nationally to the end of October and labour markets remaining extremely tight, we are yet to see either of these circumstances appear. 

The recent federal budget highlights labour markets are likely to loosen over the coming year, but the unemployment rate is forecast to remain a full percentage point below the pre-COVID decade average of 5.5%.  Strong labour market conditions and higher incomes should help to contain any material rise in distressed listings or forced sales.

Net overseas migration has bounced back quicker than expected, initially adding to rental demand, but also supporting housing demand more broadly over the medium term. 

Persistently tight rental markets and rising yields should help to incentivise investors returning to the market.  Once interest rates and housing prices stabilise, it is likely investors will become more active, positioning for medium-to-long term capital gains and taking advantage of strong rental conditions.  Higher rents could also act as a natural incentive for renters to consider buying.

Household savings and a history of higher than required mortgage repayments should also provide a buffer to higher mortgage rates and cost of living pressures.  The RBA recently noted the median variable mortgage rate borrower had enough in their offset/redraw accounts to cover 20 months of mortgage repayments (as at August).

The silver lining to falling home values is a more affordable entry point to the market for buyers.  In the most expensive capital city, Sydney, the median house value has fallen by approximately $160,000 since moving through a peak.  House values in Melbourne are roughly $76,000 lower and $64,000 lower in Brisbane.  Although borrowing capacity has also reduced sharply, the lower entry point to the market is likely to be a welcome outcome for those looking to buy.

With advertised stock levels normalising in some regions, along with fewer home sales, prospective buyers have more stock to choose from, less competition from other buyers, an improved negotiation position and more time to make their purchasing decision.

For vendors, homes are taking longer to sell, auction clearance rates are generally below average and vendor discounting rates have become more substantial.  Vendors will need to be realistic about price expectations and be ready to negotiate.  A high quality marketing campaign will be important to reach the right audience and help the property to stand out from other listings.

Although we are approaching the end of the year, there is still plenty going on in the housing market!  You can stay up to date with all the trends at the research pages of corelogic.com.au

Welcome to CoreLogic’s housing market update for October 2022.

CoreLogic reported a further fall in housing values through the first month of spring, with our national Home Value Index recording a -1.4% decline.  Although values are still falling quite rapidly, the rate of decline eased from a -1.6% fall in August.

The loss of momentum in the pace of value decline was evident across most of the capital cities and broad rest-of-state regions, with a few exceptions, including Adelaide and Perth where housing values have only recently started to edge lower. 

Although the downwards trend in housing values has decelerated, it’s probably too early to suggest the housing market has moved through the worst of the downturn.  Possibly we have seen the initial shock of a rapid rise in interest rates pass through the market and most borrowers and prospective home buyers have ‘priced in’ further rate hikes.  However, if interest rates continue to rise as rapidly as they have since May, we could see the rate of decline in housing values accelerate once again.

The reduction in the rate of decline occurred just as other indicators recorded improvements.  Auction clearance rates trended upwards, albeit subtly, in September and consumer sentiment nudged a little higher as well on the back of strong labour market conditions. Unusually for this time of year we’ve also seen the flow of fresh listings continue to decrease during the first month of spring, helping to keep a lid on overall advertised supply levels.

After rising 25.5% over the recent growth cycle, housing values across the combined capitals index are now -5.5% below the recent peak, or in dollar terms, down approximately -$46,100.  The combined regionals index, which recorded stronger growth conditions through the upswing rising by almost 42%, peaked in June with values down -3.6% through to the end of September. This equates to a dollar value fall of approximately -$21,700 for the combined regional dwelling values.

Most cities continue to see a substantial buffer between current housing values and where they were at the onset of COVID in March 2020.  At the combined capital city level, housing values would need to fall a further -13.5% before wiping out the gains of the recent growth cycle, while Melbourne, which saw a softer upswing than other regions, with values rising 17.3% from trough to peak, would only need to see a -4.3% fall in values before returning to pre-COVID levels.

At a time when the flow of new listings is typically ramping up, Australia’s ‘spring selling season’ is off to a slow start.  The number of new listings added to capital city housing markets through September was -12% lower than the same period a year ago and -10% below the previous five-year average.

It seems prospective vendors are prepared to wait out the housing downturn, rather than try to sell under more challenging market conditions. We haven’t seeing any evidence of distressed sales or panicked selling through the downturn to date; in fact, it has been the opposite, with the trend in newly listed properties continuing to diminish at a time when freshly advertised stock levels would normally be moving through a seasonal ramp up.  The reduced flow of new listings to the market could be a key factor helping to keep a floor under larger price falls, supporting the subtle reduction in the rate of decline through September. 

While the flow of freshly advertised housing stock has slowed, so too has buying activity.  Capital city sales activity through the September quarter was estimated to be -12.2% lower than a year ago, but still 6.5% above the previous five-year average for this time of the year.  Fewer buyers can be put down to a combination of factors including a substantial reduction in borrowing capacity as interest rates rise, low consumer sentiment and a fear of paying too much as prices fall. 

CoreLogic’s national rental index increased by 0.6% in September, the lowest monthly rise in rents since December 2021.  At the national level, rental growth moved through a peak in May 2022 with a 1.0% rise; since that time, the monthly pace of rental growth has been easing.  This trend in rents is evident across most regions, but has been clearest across regional Australia where monthly rental increases have reduced from a peak of 1.4% in January 2021 to just 0.3% in September 2022.

A gradual slowdown in rental growth in the face of such low vacancy rates could be an early sign that renters are reaching an affordability ceiling. Since the onset of COVID, capital city rents have risen 16.5% and regional rents are up 25.1%. It’s likely renters will be progressively seeking rental options across the medium to high density sector, where rents are cheaper, or maximising the number of people in the tenancy in an effort to spread higher rental costs across a larger household.

Now let’s take a look at housing trends across each of the capital cities.

Sydney housing values dropped a further -1.8% in September, which was an improvement on the -2.3% reduction recorded in August.  Since peaking in January, housing values are down -9% equating to approximately $104,000.  House values are falling faster than unit values, down -9.9% since peaking compared with a -6.6% fall in unit values through the downturn to-date.  The weaker performance for houses follows a substantially larger rise through the upswing, where house values surged by 34% compared with a 15% rise in unit values.  Sydney has recorded the sharpest drop in home sales across the capital cities, with estimated sales through the September quarter down -31% compared with a year ago and -21% below the five-year average.

After recording a relatively soft upswing, where dwelling values increased by 17.3%, Melbourne housing values are down -5.6% since peaking in February.  The market was down -1.1% in September, which was a slight improvement from the -1.2% decline in August and a -1.5% drop in values through July.  Through the recent growth cycle, Melbourne house values increased by 21% compared with a 10.5% rise in unit values.  This stronger performance for house values through the upswing has moved into reverse, with house values down -6.7% since peaking, while unit values are down -3.5%.  Home sales through the September quarter were estimated to be -2.9% lower relative to last year, when Melbourne was navigating its sixth lockdown, however sales activity over the quarter was still about 4.8% above the previous five-year average, demonstrating home buyers are still active despite higher interest rates and weaker market conditions.

After recording one of the most significant upswings across the capitals, Brisbane housing values have moved into a decline phase, with values falling -4.3% since peaking in May.  Despite the sharp adjustment from growth to decline, the monthly rate of change actually eased a little last month, from -1.8% in August to -1.7% in September.  Brisbane’s unit sector is holding up much better, with housing values only -0.3% below their recent peak, while house values are down -5.2%.  Home sales are also trending lower, with estimates for the September quarter indicating a -19% drop in sales relative to the same period a year ago.  Rents are still rising rapidly, but the rate of rental growth has also eased over recent months, from a monthly change of 1.5% in July to 1.0% in September.  Despite a slowdown in rental growth, rental yields continue to rise due to lower housing values against higher rental rates.

Adelaide home values trended lower for a second month, after peaking in July.  The rate of decline remains mild, however, with values down just -0.2% in September, following a -0.1% decline in August.  The mild decline is being driven by house values, which are down half a percent since peaking, while unit values remain at a record high so far.  Home sales are also holding up better than most cities, with the number of home sales through the September quarter estimated to be 18.5% higher than a year ago and almost 40% above the five-year average.  Lower housing values relative to most of the larger capital cities is probably one of the factors supporting demand, along with a persistently low level of available supply, where total listings remain -41% below the five-year average.

Perth home values notched up a second consecutive month of falling home values, however the rate of decline remains mild relative to the larger cities.  Home sales are also holding up, with estimates for the September quarter indicating buying activity was 5% higher than a year ago and 45% above the five-year average.  At the same time, advertised stock remains in short supply, trending lower through September to be -15% below levels at the same time last year and -35% below the five-year average.  Perth continues to show the lowest median house value of any capital city, at $585,000, which helps to explain why demand hasn’t been as impacted by lower borrowing capacity amid higher inter rates.

Hobart is moving through a relatively sharp decline in home values, with our dwelling index down -1.4% over the month, taking the cumulative decline from the May peak to -4.7%; the third largest decline from the recent peak after Sydney and Melbourne.  Like most cities, the pace of declines eased in September.  Values were down -1.4% compared with a -1.7% drop in August and -1.5% decline in July.  Hobart is one of the few cities showing a consistent rise in advertised stock levels, with the number of listings in market now 64% higher than year ago and 9% above the five-year average.  At the same time, demand is falling away, with the number of home sales through the September quarter estimated to be -9.5% lower than a year ago and almost -20% below the five-year average.

As the only capital city yet to record a decline in home values, Darwin is the last one standing. Whether this resilience to falls can last much longer is doubtful, with the rate of growth flat in September.  Although values remain at a cyclical high, the Darwin market is yet to recover from peak conditions recorded all the way back in May 2014.  House values are still -3.2% below their all time high and unit values are down a more significant -25.7%, a stark reminder of the long term weakness seen across the Darwin housing market.  Home sales are also holding up, with our estimate of sales volume for the September quarter tracking 4.8% higher than a year ago and 78% above the five-year average.

Canberra housing values were down -1.6% in September, the fourth monthly decline over the past five months.  Since peaking in April, house values have lost -5.3% of their value, while the more affordable unit sector is down a -1.7% since peaking in June.  The volume of home sales has also trended lower, estimated to be -9.2% lower through the September quarter compared with the same period a year ago.  Canberra is one of the few capital cities where advertised supply levels are rising, with the flow of new listings 11% higher relative to the five-year average.  With the flow of new listings rising while buyer activity reduces, the total number of homes for sale is normalising, recorded at -2.9% below the five-year average at the end of September.

The most important factor influencing housing markets will continue to be the trajectory of interest rates. The level at which interest rates will stabilise remains highly uncertain. The cash rate had surged 225 basis points between May and September.  Interest rates have not risen at this fast a pace since 1994, when households were arguably less sensitive to a sharp rise in the cost of debt due to lower overall debt levels.

Financial markets are now pricing in a peak in the cash rate around 4.1% between June and August of next year, while private sector economists are generally less bearish, with Bloomberg recently reporting a median forecast of 3.35% as the peak cash rate in the first quarter of next year.

The good news is inflation may be moving through a peak.  With the recent release of a monthly CPI indicator, it looks like headline inflationary pressures may have eased a little through the September quarter, with the ABS reporting a reduction in annual inflation from 7.0% over the year ending July to 6.8% over the year ending August.  If inflation is slowing, we could see the RBA start to ease back on the aggressive rate hiking cycle that commenced in May.

Once interest rates stabilise, housing prices are likely to find a floor.  Considering most economists are forecasting rates to peak through the first quarter of next year, the coming months are likely to feature further declines in home values. 

Strong labour market conditions should help to contain any material rise in mortgage distress.  With the national unemployment rate at 3.5% in August and wages growth picking up, we aren’t expecting to see a material rise in distressed listings or forced sales.

We will be watching for any signs of market distress as the dual impact of higher interest rates and high inflation impact household budgets. To date, the flow of new ‘for sale’ listings has actually trended lower as vendors retreat to the sidelines, a good indicator that home owners are weathering the downturn.

As interest rates continue to rise and inflation remains high, it’s reasonable to expect household spending will pull back.  While we are yet to see any evidence that household spending is being reined in, it’s likely that households will need to curtail their discretionary spending in order to maintain their debt servicing obligations while also dealing with higher prices on non-discretionary goods such as food and fuel.

For buyers, stock levels have normalised across the more expensive capital city markets, providing more choice and a better negotiation position.  More broadly, the opportunity presented by lower housing prices and less competition is likely to become more attractive to buyers as the housing market downturn progresses. 

For sellers, conditions have become more challenging amid less demand which means pricing expectations will need to be realistic. Vendors may need to be willing to negotiate on price and ensure they have a quality marketing campaign behind the property. 

As we move through spring and into summer, it will be important to see if this deceleration in the rate of decline persists.  You can keep up to date with housing market trends via the research pages at corelogic.com.au.

Welcome to CoreLogic’s housing market update for September 2022

The housing downturn accelerated through August, as falling values became more widespread, taking CoreLogic’s national Home Value Index into a fourth consecutive month of decline. The national index was down -1.6% over the month, which was the largest month-on-month decline since 1983.

Every capital city apart from Darwin is now in a housing downturn, with a similar scenario playing out across the rest-of-state regions, where only regional South Australia recorded an increase in housing values for the month.

Sydney continued to the lead the downswing, with values falling -2.3% over the month, however weaker conditions in Brisbane accelerated sharply through August, with values falling -1.8%.

After recording significantly stronger appreciation through the upswing, the fall in regional dwelling values is catching up with the capital cities. Regional home values were down -1.5% in August compared with a -1.6% fall in values across the combined capitals. Between March 2020 and January 2022 regional dwelling values surged more than 40% compared with a 25.5% rise for the combined capitals.

The largest falls in regional home values are emanating from the commutable lifestyle hubs where housing values had surged prior to the recent rate hikes. Over the past three months, values are down -8.0% across the Richmond-Tweed, -4.8% lower across the Southern Highlands-Shoalhaven market and down -4.5% across Queensland’s Sunshine Coast, as a few examples.

Despite the recent weakness, housing values across most regions remain well above pre-COVID levels. Home values in all capital cities and rest-of-state regions, bar Melbourne, remain 15% or above the levels recorded in March 2020, implying most home owners have a significant equity buffer before their home is likely to be worth less than what they paid.

Rents are bucking the downwards trend, with our national rental index increasing a further 0.8% in August. The monthly rise has eased a little since peaking in May when rents rose by 1.0%, but the current rate of rental appreciation remains well above average. Annual rental growth reached double digits, at 10.0% over the twelve months to August, for the first time since at least 2006 when CoreLogic rental statistics commence.  

With rents consistently rising while housing values broadly trend lower, gross rental yields are firmly in recovery mode. After capital city gross dwelling yields bottomed out at the record low of 2.96% in February this year, yields have consistently risen to reach 3.29% in August.

While capital city yields are still well below the pre-COVID decade average (4.0%), considering the outlook for lower housing values and higher rents, we could see rental yields returning to around average levels over the next year.

Let’s take a look around the grounds.

Sydney continued to lead the housing downturn, with home values falling -2.3% in August. This was the seventh consecutive month of falls, taking the cumulative decline in Sydney home values to -7.4%, or roughly $85,000 in dollar terms. The drop comes after a 27.7% rise in housing values which added approximately $250,000 to the median dwelling value. With weaker market conditions, the volume of home sales across Sydney are now tracking about -23% below the previous five-year average. With less demand, advertised stock levels have also risen to above average levels, tracking 8.8% above the five-year average at the end of August. With higher stock levels and less demand, buyers are well and truly back in the driver’s seat.

Melbourne housing values moved into a sixth month of decline through August, although the month-on-month fall, at -1.2%, decelerated from July’s reading where values were down -1.5%. It might be too early to suggest Melbourne has moved through its peak rate of decline, this will be a trend to watch. Home sales were estimated to be -8.7% below the previous five-year average over the three months to August, while the flow of new listings coming onto the market was 21.8% above the five-year average for this time of year. With lower demand and a higher than normal level of new listings flowing into the market, total inventory levels started the spring season about 17% higher than average, providing more choice for prospective buyers.

Brisbane’s housing market took a sharp negative turn through August, recording the second largest month-on-month fall in housing values across the capitals, down -1.8%. The sudden transition into downturn comes after Brisbane housing values surged 42.7% higher through the upswing, adding roughly $234,000 to the median value.  The decline was most evident across the detached housing sector, where values are down -3.2% since peaking in May, while the unit sector has been more resilient, posting a smaller -0.2% decline since its July peak. Home sales are trending lower, but remained about 20% above the five-year average over the three months ending August.

Adelaide housing been more resilient to falls than most regions, but values are succumbing to the downwards pressure of higher interest rates, slipping -0.1% lower in August. Although the monthly reading was relatively flat, the trend is suggesting a further reduction in Adelaide home values is likely to be in store. Despite the flattening out in housing values, sales activity has been less affected. Over the three months ending August, CoreLogic’s estimate of home sales was tracking 21% above levels a year ago and 45% above the five-year average, demonstrating ongoing demand for Adelaide’s relatively affordable housing stock.

Perth dwelling values nudged -0.2% lower in August, the first month-on-month decline since a brief fall in October last year. The August decline was confined to upper quartile for houses, where values were down half a per cent in August, and the broad middle of the market for houses where values were down -0.1%. Unit value and the lower quartile of the detached housing sector continued to record a rise in values. Although values have nudged lower across some sectors of the market, demand for housing has remained strong across Perth, with CoreLogic’s estimate of settled sales tracking 3.6% higher than a year ago and 42% above the five-year average for this time of the year.

Hobart dwelling values were down again in August, following a decline in values over three of the past four months. Since peaking in May, values are down -3.3%, taking roughly $25,000 off the median value to date. The unit market has shown a weaker trajectory relative to houses, with unit values down -4.5% compared with a -3.4% drop in house values. The weaker conditions across the unit market follow a larger upswing, where unit values rose 40% through the upswing compared with a 37.87% rise for houses. Demand across Hobart has eased, with home sales over the three months ending August estimated to be 1.2% lower than a year ago and 15.2% below the five-year average.

Darwin was the only capital city to avoid a fall in housing values through August, with house values gaining 1.1% over the month while unit values were up 0.6%. Housing values have jumped 31% higher through the cycle to date, but despite such growth, the market remains -10.1% below the 2014 peak in values; a stark reminder of the long running downturn between 2014 and 2020. At 6.2%, gross rental yields remain by far the highest of any capital city, a factor that, together with relatively low housing prices, could start to attract more investment demand. Demand for housing is looking resilient as well, with home sales over the past three months estimated to be 5.2% higher than a year ago and well above the five-year average.

Canberra housing values have fallen in three of the past four months, taking the market -2.9% below its recent peak. The recent drop in values comes after a 38.3% surge which added approximately $259,000 to the median value. As conditions ease we are also seeing a slowdown in home sales, with estimates for the three months ending August down -19% on the same time last year. Lower demand has also led to an accumulation of advertised stock, which was roughly in line with the five-year average at the end of August, but more than 40% higher relative to levels at the same time last year.

The outlook for the housing market remains intertwined with the trajectory of interest rates. Forecasts for the terminal cash rate generally range from the mid-2% to the mid-3% range, although financial markets are pricing in a peak cash rate around 4% by August next year. The range of forecasts for the cash rate highlights the sheer uncertainty associated with inflation, wages growth and monetary policy.

As borrowing power is eroded by higher interest rates and rising household expenses due to inflation, it’s reasonable to expect a further decline in consumer confidence and lower housing demand.

The silver lining to lower housing prices is an improvement in some measures of housing affordability measures. The time needed to save a 20% deposit is trending lower for the first time in almost two years across the capital cities, while the dwelling value to income ratio has also started to reduce. As housing values trend lower and incomes rise, we expect to see a further reduction in these barriers to entering the housing market.

However, on the downside for prospective home buyers, mortgage costs and rents are rising, and household budgets are stretched. The portion of annual household income required to service a new mortgage nationally increased to 44.0% in June, up from 40.4% over the March 2022 quarter, offsetting some of the improvements in other measures of housing affordability.

The wash up is that lower housing prices and higher incomes should make home ownership more achievable for non-home owners, but headwinds remain in being able to save for a deposit and demonstrate the ability to service a loan amid such a high cost of living.  

With spring upon us, advertised stock levels are expected to rise. Inventory was already higher than average across Sydney, Melbourne and Hobart at the end of winter and, although the flow of new listings may not be as high as previous years, we could see advertised supply accumulating through spring due to a lack of housing demand.

Amid higher advertised stock levels, vendors will be competing across a larger pool of available supply for fewer buyers. While this is positive news for buyers, sellers will need to be realistic in their pricing expectations and ensure they have a quality marketing campaign in place.

With labour markets so tight, demonstrated by a 3.4% unemployment rate in July, and some momentum gathering in income growth, we are not likely to see a material increase in the number of distressed listings or forced sales, despite the higher interest rate environment. While labour markets could loosen to some extent under a contractionary interest rate setting, a substantial rise in unemployment or under employment seems an unlikely outcome.

The risk of housing stress is further minimised by serviceability buffers applied to borrowers as part of the loan approval assessment.

As a closing remark, the context of the recent upswing is important to remember as the market navigates a downturn. Although housing values are on track to record a significant drop, the risk of widespread negative equity remains low, considering the substantial rise in housing values between September 2020 and April 2022. Nationally home values rose by 28.6%; so even a 20% decline in housing values would result in housing values remaining above their pre-COVID levels.

No doubt we will continue to see a great deal of interest in housing trends as we move through spring. You can stay in touch with all our research at corelogic.com.au

Welcome to CoreLogic’s housing market update for August 2022.

Australian dwelling values fell by -1.3% last month, marking the third month in a row where our national Home Value Index has fallen. This most recent three month period coincides with three months of interest rate hikes, providing the first opportunity since 2010 to observe the impact of higher interest rates on housing market conditions. Nationally, values are down 2.0% since their April peak, however the downwards trend comes after national dwelling values surged 28.6% through the pandemic growth phase.

Five of the eight capital cities recorded a month-on-month decline in July, led by Sydney and Melbourne. Brisbane also fell for the first time since August 2020, while Canberra and Hobart were also down over the month.  

Although Perth, Adelaide and Darwin remained in positive growth through July, each of these markets have recorded a slowdown in the pace of capital gains since the first interest rate hike in May.

Although the rate of growth in housing values was slowing well before interest rates started to rise, its abundantly clear markets have weakened quite sharply since the first rate rise on May 5. At a national level, the rate of decline is comparable with the onset of the global financial crisis in 2008, as well as the sharp downswing of the early 1980s. In Sydney, where the downturn has been particularly sharp, we are seeing the sharpest value falls in almost 40 years.

Regional markets have also weakened, with the combined regionals index recording the first monthly decline since August 2020. Dwelling values were down across most of the broad rest of state regions, but continued to trend higher in Regional SA and Regional WA. 

Overall, regional markets are still outperforming their capital city counterparts, but this month’s figures show major regional centres are not immune to falling home values. 

Dwelling values across CoreLogic’s combined regionals index were up 41.1% from the pandemic trough to the June peak, compared with a 25.5% rise across the combined capitals index. The stronger growth reflects a significant demographic shift towards commutable regional markets, which is likely to have some permanency as more workers take advantage of formalised hybrid employment arrangements. 

Regional areas recording the most significant falls tend to be the major regional centres within commuting distance of Sydney, Melbourne and Brisbane, which are also the same markets that typically recorded the largest gains through the growth phase.

We are also seeing unit values across the combined capitals recording smaller falls relative to house values. This trend is most apparent across the three largest capitals as well as Canberra, where affordability challenges may be pushing more demand towards the medium to high density housing. Additionally, firmer interest from investors should favour the unit market over houses where demand has historically been more concentrated.

Turning our attention to housing demand, CoreLogic’s estimate of sales activity over the three months to July was -16.0% lower relative to the same period in 2021. The national figures are heavily impacted by an estimated -40% drop in sales across Sydney and a -26% fall in Melbourne sales, relative to the same period a year ago. Stronger markets such as Adelaide and Perth have recorded a rise in activity, with the estimated volume of sales up 22% and 7% respectively.

There is a good chance the number of properties sold in the second half of this year and into 2023 will continue to trend lower as higher interest rates, a more cautious lending environment and a reduction in household confidence continues to weigh on housing demand.

Rents continued to trend higher through July, rising 0.9% nationally over the month to be 9.8% higher over the past 12 months, which is the highest annual rate of growth since at least 2006 when CoreLogic began tracking rental markets. The trend in rising rents is evident across each of the capital city and broad rest of state markets, led by Brisbane with a 4.2% rental rise over the three months to July. 

Rental markets are extremely tight, with vacancy rates around 1% or lower across many parts of Australia. The number of rental listings available nationally has dropped by a third compared to the five-year average, with no signs of a lift in rental supply. On top of already tight rental supply, it’s likely demand will continue to increase as overseas arrival numbers climb.

With rents rising faster than values, yields are consistently improving, albeit from record lows. Across the combined capital cities, the gross yield has increased from a record low of 2.9% in February 2022 to 3.2% in July. The most rapid yield recoveries have occurred across the Sydney and Melbourne unit markets, where gross yields have increased by 45 and 40 basis points respectively.

Such tight rental markets, improving yields and stronger buying conditions may help to keep a floor under investment demand.

As always, housing conditions are different from city to city.

Sydney is once again leading the housing cycle, with values peaking much earlier than other cities back in January. It’s also the first city to enter the downswing with housing values dropping 5.2% since that time. However, it will take a significant downturn to reverse the 28% rise in values recorded through the growth phase. House values across Sydney have accrued a much higher capital gain through the growth cycle than units, rising by 34% from the COVID trough to recent peak, while unit values have increased by less than half that amount, up 15.4%. However, the most recent trend is now seeing house values falling at a faster rate than units, as demand across the more affordable unit sector holds firmer. Sales activity has trended lower quite sharply, dropping by roughly 40% over the past three months compared with the same period a year ago, demonstrating less demand as interest rates rise.

Melbourne housing values peaked shortly after Sydney, in February this year, following a 17.3% gain in values since the pandemic.  Property values are down 3.4%, since the February peak, with house values down 4.1% and units falling 2.1%. Of course, house values recorded a larger upswing, rising almost 21% though the growth cycle compared with lower 10.5% gain across the unit market. In another sign of slower conditions, the quarterly transaction volumes across Melbourne has slumped by an estimated 26% compared with the same period a year ago. As home sales have declined, listings have risen, with Melbourne recording 10% more active listings in July than a year ago.

Brisbane’s housing market recorded the first month on month decline since August 2020, with values down 0.8% in July. The monthly decline was entirely due to weaker house values, which fell 1.1% in July, while unit values across Brisbane increased 0.7%. Although unit values have been more resilient so far, the softening quarterly trend suggests that unit values will probably start to trend lower over the coming months as well. As conditions cool, Brisbane home sales have also trended lower, falling by an estimated 8.5% over the past three months compared with the same time last year. Although values and the volume of sales are down, the context is important. Brisbane home values surged almost 43% higher through the upswing, adding roughly $236,000 to the median dwelling value.

Adelaide remains one of the few capital cities where housing values are still rising, despite higher interest rates and a recent history of surging values. Dwelling values have increased by almost 45% through the growth cycle to-date, adding approximately $201,000 to the value of an Adelaide dwelling. Although the market remains in positive territory, the pace of gains is clearly losing steam. The quarterly growth rate has reduced from 7.4% over the three months to January, to 3.6% over the most recent three month period. Considering the softening growth trajectory, it looks like that Adelaide housing values will move into decline over the coming months. Home sales are holding strong though, with the number of properties sold over the past three months up 22% compared with last year.

Perth housing values were up 0.2% in July, marking Perth as one of only three capitals to record an increase over the month. Perth housing values remain at record highs, having risen by 25.9% through the growth cycle to date. Although values are still rising, the pace of growth has noticeably eased since interest rates started rising in May and, despite extremely low advertised stock levels and ongoing strong demand, the trend is pointing towards lower housing values over the coming months. Arguably Perth’s strong foundations should help to insulate the market from a material downturn. Stock levels remain low, housing is substantially more affordable than other capitals, the local economy is strong and interstate migration is well and truly and record highs.

Hobart housing values have been trending lower since peaking in May, tracking lower over three of the past four months. Since moving through a peak, Hobart housing values are down 1.7%, led by a 2.9% drop in unit values. As the market cools we have also seen less buying activity. Home sales are down 5.6% over the past three months compared with the same time a year ago. At the same time, advertised stock levels have risen sharply to be 60% higher than a year ago, although a year ago stock levels were around record lows. The recent weakness comes after dwelling values rose 38% through the pandemic growth cycle.

Darwin housing values were up half a percent in July, continuing a relatively mild run of growth. Housing values have increased 5.3% over the past 12 months and 30% through the growth cycle to date. The growth trend has slowed over recent months, suggesting we could see Darwin housing values slip a little lower as interest rates rise. However, with housing values so affordable and relatively strong economic conditions, it’s likely the Darwin housing market will be relatively insulated from a material downturn.

Canberra’s housing values have fallen over two of the past three months, breaking a 33-month run of consistent capital gains. Since peaking, the market is down 1.1%, led by a 1.5% drop in house values and a 0.2% fall in unit values. Sales activity over the past three months has fallen by 15% relative to the same time last year, resulting in a 22% jump in advertised stock levels relative to the same time a year ago. Despite the rise in listings, overall advertised stock levels remain 5.4% below the previous five year average. 

With forecasts for the cash rate ranging from the mid 2% to the early 3% range, even the best case interest rate scenario indicates variable mortgage rates will roughly double from their current level. For a household with a $750,000 mortgage, a cash rate of 2.5% implies a variable mortgage rate for a new buyer of around 4.8%, adding around $1,010 per month to mortgage repayments relative to the record low rate setting prior to May 5. A cash rate of 3.5% would add approximately $1,480 per month to the cost of a $750,000 mortgage.

As borrowing power is eroded by higher interest rates, and rising household expenses due to inflation, it’s reasonable to expect a further loss of momentum in housing demand.

On a more positive note, this interest rate hiking cycle may be short and sharp, with financial markets and some economic forecasters now factoring in interest rate cuts through the second half of 2023. When interest rates start to stabilise, or potentially reduce next year, this could be the cue for housing values to find a floor. Similar to the trajectory of the upswing, this downswing phase could be a short but sharp one, depending on how high and fast interest rate settings go.”

In the meantime, the housing market is set to face some near term challenges. 

The spring listing season will test the depth of housing demand. Historically the flow of new listings has surged through spring and early summer, typically reaching a peak in late November. The rise in freshly advertised stock may not be met with a commensurate lift in buyer demand, resulting in higher levels of housing inventory. 

By late spring or early summer, we could see advertised stock reach higher than normal levels. Vendors are likely to be more competitive across a smaller pool of active buyers, which would drive clearance rates lower across auction markets, and result in longer selling times and larger discounting rates for private treaty sales.

Borrowers who locked into a fixed term mortgage rate through the pandemic growth cycle will be facing a significant refinancing event once their fixed rate expires. ABS housing finance data shows that fixed rate borrowing peaked at 46% of mortgage originations between July and August 2021. RBA analysis is forecasting a surge in fixed loan expiries throughout the second half of next year. Many of these borrowers could be moving from mortgage rates around the high 1% to low 2% range to a mortgage rate closer to 6% or higher.

The risk of a rise in distressed property sales due to debt servicing challenges is at least partially offset by extremely tight labour markets and high repayment buffers, in the form of savings and offset accounts, accumulated over the COVID period. 

However, for mortgage holders in 2022, income growth has been a little more elusive than past periods of high inflation. Income growth will be an important factor in how well the housing market performs amid rate hikes. ABS data shows the wage price index was up 2.4% in the year to March, below the series average growth of 3.0%, but growth is climbing from a low of 1.2% over the year to September 2020. 

Overall, the trajectory of home values will be inversely correlated with the path interest rates take. With the RBA expecting inflation to peak towards the end of this year, we could see interest rates levelling out through the first half of 2023. If that is the case, it will probably be the cue for housing values to find a floor as well.

While housing values are set to fall further over the remainder of the year and into 2023, the silver lining will be seen in improvements to housing accessibility. Lower housing prices will help to boost home ownership in the long run and support an improvement in overall housing affordability.

I think it’s going to be an interesting second half of the year. If you would like to keep up to date with our research in more detail, make sure you visit the research pages at corelogic.com.au

Welcome to CoreLogic’s housing market update for July 2022. 

Our national Home Value Index recorded a second consecutive month of decline in June, down -0.6%, to be -0.2% lower over the June quarter. Continued falls in Sydney and Melbourne were the primary drivers of this month’s steeper drop, but housing values were also down in Hobart and regional Victoria.  Every capital city and broad rest of state region is now well past their peak rate of growth as the trend of value increases eases across the remaining markets.

National housing values have been easing since moving through a peak in March last year, when early drivers of the slowdown included rising fixed term mortgage rates, an expiry of fiscal support, a trend towards lower consumer sentiment, affordability challenges and tighter credit conditions.

More recently, surging inflation and a rapidly rising cash rate have been additional headwinds for home values. Since the initial cash rate hike on May 5^th, most housing markets around the country have seen a sharper reduction in the rate of growth.

Looking below the headline capital city trends, the combined regionals index remained in positive growth territory in June, albeit slightly, rising 0.1%. Its quarterly value change reduced from a peak of 6.6% in April last year, to 2.0% over the three months to June. In contrast, the combined capital cities index was down -0.8% over the June quarter, reducing from a peak of 7.1% over the three months to May last year.

Also, unit markets are holding their value a little better than houses across the largest capitals. Sydney recorded a -3.0% drop in house values through the June quarter compared with a -2.1% fall in unit values. Melbourne also showed a smaller quarterly decline in units relative to houses at -0.5% and -2.4% respectively. 

The stronger performance across the unit sector comes after house values consistently outperformed units through the upswing.  Since the onset of the pandemic in March 2020, capital city unit values have risen 9.8% compared to 24.7% for houses, resulting in better affordability across the medium to high density sector.

As housing conditions slow, we are seeing the market swinging back in favour of buyers.  While national advertised stock levels remain 6% lower relative to 2021, in Sydney and Melbourne, where housing conditions are the weakest, total advertised supply is now well above the levels recorded a year ago and higher than the five-year average.  Hobart has seen advertised stock levels jump 54% higher relative to last year and inventory is 19% higher in Canberra.

The rise in advertised supply across some markets is mostly due to a slowdown in the rate of absorption.  Nationally, home sales were down -16% in the June quarter compared with the same period last year, but still holding 13% above the previous five-year average.

Tougher selling conditions are evident in weekly auction results, where the combined capital city clearance rate has held below 60% since the last week of May, while private treaty sales are experiencing longer selling times and higher levels of vendor discounting rates.

On the flip side, rental markets are doing the opposite of housing values.  Rental conditions remain extremely tight around the country, with rents now consistently rising at a faster rate than housing values.

Nationally, rents increased 0.9% in June, taking the annual growth rate to 9.5%, the highest 12-month change in rents since December 2007 when record levels of overseas migration pushed rental demand higher. 

At the national level, rents have been rising faster than housing values for five months now, placing renewed upwards pressure on yields.  After bottoming out at a record low of 3.21% in the first two months of 2022, the average gross yield has increased to 3.33%.

With rental markets expected to remain tight, it’s likely rents will continue to outpace growth in housing values, driving a rapid recovery in rental yields.  Higher yields may help to offset less demand from investors, although this sector of the market is generally more motivated by prospects of capital gains than rental returns.

Let’s take a look at the trends in more detail across each of the capital cities.

After housing values surged by 28% through the pandemic, Sydney’s are now consistently trending lower, chalking up the fifth consecutive month of decline in June.  Since peaking, Sydney housing values have reduced by -3.1% or approximately $35,200. House values are recording a sharper drop than unit values, down -3.2% and -2.9% respectively from their recent peaks, but the larger decline in house values comes after a more significant upswing.  Sydney house values surged 34% higher through the growth cycle while unit values were up less than half that at 15%.  As the market cools, the number of home sales has fallen by about a third in the June quarter compared with the same period a year ago, paving the way for a rise in advertised supply and more challenging selling conditions.

Housing values across Melbourne increased by 17% through the growth phase, with house values up 21% while unit values rose 11%.  Since peaking in February, house values are down -3% and unit values have reduced by -1%.  Taking the recent decline into consideration, Melbourne housing values are up by 8.6% or roughly $24,200 since the onset of COVID in March 2020.  As conditions cool, the number of home sales is also trending lower, down by an estimated -18% in the June quarter compared with the same period last year. As buyer demand wanes, advertised supply levels have risen to be 3% higher than a year ago and 9% above the five-year average for this time of the year.  With more stock, market conditions are now favouring buyers over sellers with clearance rates holding below 60% through June while days on market and vendor discounting rates trended higher for private treaty sales.

Brisbane’s rate of growth in housing values has eased sharply, reducing from a quarterly trend rate of 8.5% through the December quarter to 2.7% in the June quarter.  The monthly rise was just 0.1% in June.  If this trajectory continues, we are likely to see Brisbane housing values declining month-on-month through July.  Growth conditions are cooling more noticeably for houses rather than units.  Over the quarter Brisbane house values were up 2.5% compared with a 3.5% rise in unit values.  As the market slows, the number of home sales through the June quarter was estimated to be -7.5% below the same period last year.  Less demand has also flowed through to a consistent rise in advertised stock levels, along with a rise in average days on market and higher vendor discounting rates.

Adelaide has continued to stand out as the nation’s strongest capital city housing market, with dwelling values up a further 1.3% in June.  Through the growth cycle so far, Adelaide housing values have increased by 44% adding roughly $197,000 to the median dwelling value.  Most of this growth has been centred in the house market rather than units, with values up 48% through the growth cycle to date for houses while unit values are up a smaller 23%.  With advertised supply levels still -16% below a year ago and -39% below the previous five-year average, it’s likely sellers will continue to see prices rising over the coming months but at a slower pace as interest rate rises and affordability dampens demand.

Perth housing values were up 0.4% in June, marking the second month in a row where the rate of capital gain has reduced.  The slowdown follows a temporary rebound in Perth’s rate of growth that coincided with reopened state borders, however it is looking like the Perth market is losing some steam alongside the national trend.  Advertised housing stock remains extremely low and is trending lower as buying activity remains elevated, implying selling conditions remain strong across the Perth market.  This is backed up by rapid selling times as homes average just 18 days to sell, although such rapid selling time has occurred as discounting rates have edged higher.  With the median dwelling value of $558,600 remaining the lowest across the capital cities, housing affordability is far less challenging than other capital cities, which could help to insulate the Perth market from a larger downturn.

Hobart home values were down -0.2% in June, the second month-on-month decline over the past three months. The negative results in April and June were enough to drag the quarterly result into negative territory for the first time since June 2019.  As market conditions ease, buyer demand is also reducing.  Home sales through the June quarter were estimated to be almost -11% below the five-year average.  With fewer buyers, advertised stock levels have risen substantially, albeit from virtually record lows to be 54% higher than a year ago but still below the five-year average.

Darwin dwelling values were 2.3% higher over the June quarter, the third highest growth rate after Adelaide and Brisbane.  Despite the relatively strong reading over the quarter, Darwin housing values are only 6.5% higher over the year, reflecting relatively soft conditions through the second half of 2021.  Sales activity has also picked up across Darwin, with home sales in the June quarter estimated to be 28% above levels a year ago.  With a median value just under $510,000, Darwin housing prices remain very affordable and continue to attract the highest rental yields amongst the capital cities.

The growth trajectory for housing values across the ACT has eased over the past 10 months, after moving through a peak quarterly rate of growth in August last year.  At that time, values were rising by 7.3%, but since then the quarterly pace of growth has reduced back to 1.5%, the lowest level since August 2020.  The number of home sales was estimated to be -14% lower in the June quarter compared with a year ago and listing numbers are now 19% above levels from a year ago.  As buyers have more choice, homes are taking a little longer to sell and discounting rates have increased by more than a percentage point over the past 12 months.

Australia’s housing market outlook is becoming increasingly skewed to the downside, with the trajectory of housing values heavily dependent on the path interest rates take.

While forecasts vary significantly it’s entirely possible the cash rate could rise beyond the pre-COVID 10-year average of 2.56%.  Under this scenario, the average variable mortgage rate for new owner occupier loans would be approximately 4.9%, more than double the 2.4% average variable mortgage rate in April, adding roughly $720 per month to a $500,000 mortgage or $1,445 per month to a $1 million loan.

Households are likely to be all the more sensitive to rising interest rates due to record levels of debt held by the sector.  Household debt to income ratios from the RBA indicate debt levels reached new record highs in the March quarter.  The ratio of household debt to disposable income was recorded at just over 187%, the large majority of which was held in housing debt.

The double whammy of high inflation is another factor likely to weigh on the household sector and ultimately housing demand.  Non-discretionary inflation is rising at more than double the pace of discretionary inflation, which means households are likely to be saving less as they spend more on essentials such as food, fuel and shelter. 

Lower savings and higher expenses along with rising interest rates will have an ongoing impact on borrowing capacity for households.  Reduced borrowing capacity is likely to further diminish housing demand and potentially deflect more home buyers towards the middle to lower end of the pricing spectrum.

Higher interest rates and rising inflation are also both likely to continue to weigh on consumer sentiment. Housing activity and consumer sentiment are highly correlated.  A pessimistic mindset among consumers implies a further reduction in home sales.  If sentiment remains subdued we are likely to see the number of home sales drift lower as housing demand cools and lenders become more cautious in their approach towards borrowers.

How far housing values fall through the downturn remains highly uncertain, however a peak to trough decline of more than -10% is becoming a mainstream outlook across the various private sector forecasts.  A -10% decline in the market would take national housing values back to levels similar to July 2021.  A -15% decline would take the market back to April 2021 levels and a -20% decline in home values would take the national index to January 2021 levels, and only marginally above where home values were in late 2017.

Strong labour markets will be one key factor in supporting mortgage repayments and keeping distressed listings off the market.  Generational lows in unemployment alongside a record high participation rate will help households meet their debt repayment obligations, despite rising rates and high inflation.  A key risk for housing markets would be any material loosening in labour markets, which could be triggered if the cash rate moves to a contractionary setting, reducing economic output.

A substantial accrual in borrower repayment buffers is another factor helping to safeguard the housing market, estimated to be 21 months for owner occupiers on a variable rate mortgage, meaning most households have a significant safety net if temporarily faced with a change in circumstances.

Mortgage stress should also be minimised to some extent by mortgage serviceability assessments at the time of the loan origination. Under these serviceability scenarios it is reasonable to expect borrowers should be able to accommodate higher mortgage repayments costs, although such a rapid rate of inflation could create some challenges for borrowers on thinly stretched budgets.

Clearly the housing market is changing rapidly as rising interest rates and inflation along with low sentiment and ongoing affordability challenges dampen housing demand.  You can stay up to date with all the key trends by checking out the news and research pages at corelogic.com.au.

Full transcript:

Welcome to CoreLogic’s housing market update for June 2022

Housing markets lost more steam in May as a combination of higher interest rates, rising inventory levels and lower sentiment dampened conditions. CoreLogic’s Home Value Index showed Sydney and Melbourne dwelling values continued to record the most significant month-on-month falls, while Canberra recorded its first monthly decline since July 2019. 

Although housing values continued to rise across the remaining capitals, the growth was not enough to offset the depreciation in Sydney, Melbourne and Canberra, which pushed the combined capitals index -0.3% lower over the month.

Elsewhere growth trends remained positive in May, albeit with less momentum in most markets. Perth and Adelaide were the exceptions, where the quarterly growth trend lifted in May, although both regions remain below the peak quarterly rate of growth. 

While the higher cash rate and lift in variable mortgage rates in May played a role in the weaker housing values, it is important to remember market conditions have been weakening over the past year, at least at a macro level.

The quarterly rate of growth in national dwelling values peaked in May 2021, shortly after a peak in consumer sentiment and a trend towards higher fixed mortgage rates. Since then, housing has been getting more unaffordable, households have become increasingly sensitive to higher interest rates as debt levels increased, savings have reduced and lending conditions have tightened. Add to that rising inflation and a higher cost of debt, and it all flows through to less housing demand.

With the trend rate of growth easing across most regions over the past year, the annual rate of change has eased sharply over recent months, dropping to 11.7% across the combined capital cities, down from a recent peak of 21.3% over the 12 months ending January 2022. 

Although regional Australia continues to demonstrate stronger growth conditions, it’s also come off peak growth rates, with the annual growth trend easing to 22.1%, down from its January peak of 26.1% and likely to trend lower through the rest of the year. 

As the pace of growth eases across most regional markets, we’re likely to see growth conditions softening in line with higher interest rates and worsening affordability pressures. Arguably some regional markets will be slightly insulated from a material downturn in housing values due to ongoing supply and demand imbalances as we continue to see advertised stock levels remain extraordinarily low across regional Australia. 

A combination of higher interest rates, housing affordability constraints, diminishing household savings and lower consumer sentiment has also had a negative impact on home sales. Nationally, our estimate of settled sales over the three months to May was 19.2% lower than at the same time last year. The figures remain 12% above the previous five year average however it’s likely housing turnover will continue to trend back towards average levels as interest rates normalise.

Lower sale volumes are being accompanied by a gradual rise in advertised stock levels. Nationally advertised inventory is 10% below levels from a year ago, but buyers in softer markets like Sydney and Melbourne have more choice, less urgency and better leverage as advertised stock levels rise to above average levels.

While housing value growth has slowed, rents continue to rise swiftly. Nationally, CoreLogic’s Hedonic Rental Index increased 1.0% in May, taking the quarterly rate of growth to 3.0%, up 60 basis points on a year ago. Rents are up 8.8% in the past year across the combined capital cities and 10.8% across the combined regions. 

For investors, yields are recording some upwards momentum, amidst rising rents and a general easing in home value growth, especially in Sydney and Melbourne. Despite the upwards trajectory, yields remain remarkably low, but a recovery back to average levels may happen sooner rather than later if housing values continue to be outpaced by rents.

The detail remains diverse from region to region.

Sydney housing values moved through a fourth month of consecutive declines, with the magnitude of falls gathering some pace. Values were down 1% in May, taking the market 1.5% lower, or roughly $17,300 down on the January peak. As the market moves into the early phase of a downturn, sales activity is also fading, with settled sales over the past three months estimated to be down by a third relative to the same period a year ago. With a slower rate of absorption, advertised stock levels have normalised and are slightly higher than the five-year average. With more stock to choose from, homes are taking longer to sell, discounting rates have risen and auction clearance rates are trending to below average levels. With conditions gradually favouring buyers over sellers, vendors may need to adjust their pricing expectations in order to meet the market.

Melbourne housing values have declined over four of the past six months, with the 0.7% decline in May the largest monthly fall since September 2020. Larger falls are evident across the upper quartile of Melbourne’s market, where housing values are down 2.0% over the past three months. In contrast, the lower quartile of the market has seen a 1.1% rise in values over the past three months as housing demand remains stronger across the more affordable end of the market. Lower demand is reflected in our estimate of sales activity over the past three months, which was tracking 21% below levels recorded over the same period a year ago. As demand fades, advertised listings are rising. At the end of May inventory levels were 1.3% higher than at the same time last year and 8.1% above the five year average.

Brisbane housing values have continued to trend higher, although the trend rate of growth has nearly halved from the recent peak in December last year. Then housing values were rising at 8.5% over the quarter but have since eased back to 4.6% over the rolling quarter, which is still outperforming the national average growth rate of 1.1%. A key factor supporting Brisbane’s ongoing price growth is that listings remain extremely low. At the end of May, total advertised stock levels were holding 28% below the five-year average in Brisbane. At the same time, home sales have eased, but remained approximately 15% above the five-year average in May. With demand continuing to outweigh available supply, homes are selling in just 20 days on average with minimal levels of discounting.

Adelaide has been leading the capital cities for growth in housing values for several months. In May, housing values were up 1.8%, well above the monthly change recorded across the other capitals. A combination of low supply and high demand is fueling Adelaide’s growth. From the supply side, advertised stock levels were almost 40% below the five-year average at the end of May, while, on the demand side, home sales were estimated to be 32% above the five-year average. Although prices are continuing to rise faster than any other capital, there is some evidence that conditions are slowing down. The peak rate of growth, based on the rolling three month change in dwelling values, was recorded in January at 7.4% and has reduced to 5.7% over the most recent three month period.

The monthly rate of growth eased in Perth, reducing from 1.1% in April to 0.6% in May. The lower monthly growth rate is a surprise considering advertised listings trended lower through the month to be down 18% on levels recorded a year ago, while estimated sales activity increased over the month to be roughly in line with levels a year ago. With a median dwelling value of $555,500, Perth is the most affordable state capital. Along with an extremely tight labour market and strong economic conditions, the affordability advantage of the Perth housing market should help to keep a floor under housing demand as interest rates rise.

The pace of growth across Hobart has been easing since the city moved through a peak rate of growth in July last year. At that time housing values were rising at the rolling quarterly pace of 8.2%, but that figure has since reduced back to just 0.3%. A key factor in the softer growth rate is a sharp rise in Hobart listings, up 30% on last year. There’s been a noticeable reduction in sales activity, which we estimate was down 26% in May compared with the same month last year, and an increase in new listings, up 29% on last year. With available supply starting to outweigh demand, we could see the Hobart market weakening further. 

Darwin housing values were up half a percent in May, a step down in the pace of growth recorded over the past two months where the monthly growth rate was 0.8% and 0.9%. Despite the slip in capital gains, the estimated volume of sales remains well above average levels and 16% higher than year ago. Even with a higher volume of sales, advertised listings have increased by 13% relative to the same time last year, which may help to explain the recent softening in growth conditions. 

Canberra housing values recorded a rare decline in May, edging 0.1% lower over the month. Although the drop was only slight, it was the ACT’s first month on month fall in almost three years. Rather than a blip, this market softening looks to be a continuation in the slowing trend that has been evident since a peak rate of growth was recorded in August last year. Housing values were increasing at the quarterly pace of 7.3% but have since eased back to 2.2% with the potential for a further softening in the growth trend over coming months. 

As interest rates normalise over the next 12 to 18 months, the expectation is most of Australia’s capital cities will move into a period of decline brought about by less demand. The trajectory of interest rates will be a key factor in future housing market outcomes. Forecasts for where the cash rate may land are varied. After the Reserve Bank’s May board meeting, the governor noted a cash rate of 2.5% wouldn’t be an unreasonable expectation. Financial markets are still betting on a cash rate above 3% before mid-2023, while economic commentators show a broad range in their cash rate forecasts.

With the housing debt to household income ratio at record highs, household balance sheets are likely to be more sensitive to rising interest rates.

High inflation could be another factor contributing to softer growth conditions in the housing sector. A prolonged period of high inflation is likely to lead to lower rates of household saving and may potentially weaken prospective borrower’s ability to meet serviceability assessments from lenders.

Consumer sentiment also remains low. Historically there has been a strong correlation between consumer attitudes and housing market activity. 

These factors, together with stretched housing affordability and a more conservative approach from lenders, especially towards borrowers with high debt levels, are likely to contribute towards less housing demand over the medium term.

However, there are several mitigating factors to consider as well. 

Labour markets are tightening, sending the unemployment rate to generational lows and placing additional upwards pressure on wages growth. As income growth outpaces housing values, the home deposit hurdle will gradually lessen, reducing one of the key barriers to entry for home buyers.

Strong labour market conditions, together with a growing economy will help to contain mortgage arrears and mitigate some risk of a surge in forced sales placing additional downwards pressure on housing values.

Mortgage stress should also be minimised to some extent by mortgage serviceability assessments at the time of the loan origination. All borrowers have been assessed under a mortgage rate scenario 2.5 percentage points higher than the origination rate, and since October last year, borrowers were being assessed with a buffer of 3 percentage points.

Under these serviceability scenarios, it is reasonable to expect borrowers should be able to accommodate higher mortgage repayments costs, although such a rapid rate of inflation could create some challenges for borrowers with thinly stretched budgets. With the RBA set to steadily raise the cash rate through the rest of the year and into 2023, we are likely to see falls in housing values become more widespread as mortgage rates trend higher.

As these trends evolve we will be keenly reporting all the twists and turns at the research pages of corelogic.com.au

Full transcript:

Welcome to CoreLogic’s housing market update for May 2022. 

Housing values are still rising at the national level, however, with a rise of just 0.6% over the month, April’s growth rate was the lowest reading since October 2020.

Sydney and Melbourne were the main drag on the headline growth rates. Sydney housing values recorded the third consecutive month-on-month decline, down 0.2%, while Melbourne home values were virtually flat with a decline of just 0.04%. Technically values are down over three of the past five months in Melbourne.  Hobart also recorded a negative monthly change, down 0.3%, which was the city’s first monthly fall in 22 months.

The weakening state of the market has taken the rolling quarterly trend into negative territory across Sydney and Melbourne for the first time since these cities were in the midst of the first extended lockdowns of 2020.

Demonstrating the diversity in housing conditions across the broad regions of Australia, half of the capitals are still recording a monthly growth rate above 1%.  Adelaide, at 1.9%, led the monthly pace of capital gains, followed by Brisbane, Canberra, and Perth. 

Although monthly growth rates remain high in these markets, the trend rate of growth is easing in these areas as well. Perth and Darwin are the exceptions, where the rolling quarterly trend has gathered some steam since late last year. A rebound in migration rates as state and international borders re-opened could partially explain the renewed exuberance, along with persistently low advertised stock levels and strong economic conditions, especially in WA.

Regional Australian housing markets have been somewhat insulated from the slowdown, with housing values up 1.4% in April across the combined regionals index, compared with a 0.3% gain across the combined capitals.  Advertised stock levels remain 42% below the previous five-year average across the regions, while the volume of home sales is holding 20% above the previous five-year average.  The imbalance between available supply and demonstrated demand is a key factor supporting growth in housing prices across regional Australia, however the trend rate of growth is generally slowing as affordability constraints become more challenging.

Stretched housing affordability, higher fixed term mortgage rates, a rise in listing numbers across some cities and lower consumer sentiment have been weighing on housing conditions over the past year. With the RBA cash rate now rising, we are likely to see a further loss of momentum in housing conditions over the remainder of the year and into 2023.  As the cash rate rises, variable mortgage rates will also trend higher, reducing borrowing capacity and impacting borrower serviceability assessments.

While the macro trends are clearly softening, conditions remain diverse across the major regions of Australia.

In Sydney, housing values slipped lower over the past three months, taking the rolling quarterly change in dwelling values into negative territory for the first time since late 2020.  The drop in values is currently confined to Sydney’s premium markets, with upper quartile house values down 1.5% over the past three months compared with a 2.5% rise across lower quartile house values.  A similar trend can be seen in the unit sector where values are down 2.2% across the upper quartile but rose by 0.3% across the lower quartile of the market.  Its normal for the more expensive sector of the market to lead the cycle, so it wouldn’t be surprising to see lower quartile housing values starting to slip over comings months as well.  With advertised stock levels now roughly in line with the five year average, homes are taking a bit longer to sell and auction clearance rates have reduced to below average levels, providing an improvement in buying conditions over recent months.

Melbourne dwelling values held reasonably firm last month, marking the fifth consecutive month where values have been flat to falling.  The unit market is showing slightly stronger conditions relative to houses, with unit values continuing to rise at the rolling quarterly pace of 0.6% while house values were down half a percent over the past three months.   The stronger performance across the unit sector is quite the turn of events.  The growth rate in unit values was less than half the growth rate of houses over the past 12 months.  With Melbourne property listings now tracking 5.5% above the five year average, buyers are moving into a stronger position, resulting in longer vendor selling times and lower auction clearance rates.

Brisbane remains one of the nation’s hottest housing markets, with housing values rising a further 1.7% in April, taking the three month growth rate to 5.7% which is the fastest quarterly pace of growth in housing values amongst the capitals.  Despite the strong capital gain conditions, our estimate of home sales has reduced by 15% compared with the same period a year, which may be a reflection of both slowing demand, but also diminished supply following the wide spread floods in late February.   Although sales activity has reduced, the number of sales over the past three months was 21% above the five year average while listings remain about 40% below average.  This ongoing imbalance between supply and demand is likely to keep some upwards pressure on housing prices in the face of higher interest rates, at least until advertised supply levels start to normalise.

Adelaide topped the capital city growth tables in April with housing values rising by 1.9% in the month, adding approximately $11,500 to the value of the typical dwelling.  Adelaide home buyers continue to face significant stock shortages, with advertised listings remaining more than 40% below the five year average.  At the same time, our estimate of home sales over the past three months was tracking 40% above the five year average.  It’s this disconnect between available supply and housing demand that is continuing to drive up prices and will probably insulate Adelaide’s housing market from lower prices, at least while supply is being outweighed by demand.  The strong selling conditions are also evident in consistently high clearance rates which have remained around the 80% mark through April. 

Perth’s housing market has caught a second wind, with the rate of growth in housing values running counter cyclical to the other state capitals.  Momentum has been building since the rate of growth moved through a recent low at the end of last year when the quarterly rate of growth virtually flatlined at 0.4%. The trend rate of growth has since lifted to 2.4% over the most recent three months and the monthly growth rate of 1.1% was at its highest level since May last year.  Re-opened state borders, relatively affordable housing options, a sub-4% unemployment rate and strong jobs growth are likely to be the main factors driving the rebound in Perth housing values.

Hobart reported a rare month on month decline in housing prices through April, with the index dropping 0.3%.  This was the first decline in housing values since the early stages of the pandemic.  The fall in housing values was attributable to a 0.4% fall in house values, which was partially offset by a 0.6% rise in unit values.  In fact, Hobart unit values have generally recorded stronger growth conditions throughout the pandemic cycle, lifting by 23.2% over the past twelve months compared with a 20.1% gain in house values.  Hobart has stood out over the past five years as recording, by far, the highest rate of growth in housing values of any capital city, so no doubt affordability pressures are adding to the slower level of housing demand.

The pace of growth in Darwin housing values has lifted over recent months, with rolling three month change rising from just 0.2% in November last year to reach 2.2% growth over the most recent three month period.  Sales activity has started the year on a strong footing, with around double the number of home sales over the past three months compared with the same period a year ago.  While demand looks to be strong, listing numbers remain about 18% below the five year average, adding some urgency to buyer decision making.

Canberra posted another strong month for housing values, with CoreLogic’s dwelling index rising 1.3% over the month, adding approximately $12,300 to the median value of a home.  Its has been the unit market driving the strongest gains, where values are up 3.8% over the most recent three month period compared with a 2.5% gain in house values.  Arguably high housing prices are deflecting more demand towards the medium to high density sector where prices are roughly $450,000 lower compared with houses.

At a macro-level, housing market conditions have been easing since moving through a peak rate of growth in March last year.  With the cash rate now normalising, we expect this trend towards a gradual softening in the growth rate will become more pronounced over the coming months, before the national index starts to trend lower.

Although we are expecting the housing market to move into a downturn through the second half of the year, it is important to remember the context of the recent growth phase. Since the onset of the pandemic, national housing values have increased by 26.2%, adding approximately $155,380 to the median value of an Australian dwelling.

The RBA recently noted a 2-percentage point rise in interest rates could lower real housing prices by 15%.  Under this scenario, national dwelling values would be at a similar level to where they were in April 2021.  Those who purchased a home over the past year will likely see the value of their home fall below the purchase price, but considering most borrowers were purchasing with a loan to valuation ratio of less than 80%, instances of negative equity are likely to be infrequent.

The extent of any housing market downturn depends on how high and how fast interest rates rise, but also a variety of other factors will be at play.  Labour markets are currently showing the lowest unemployment rate since the mid-1970’s, and conditions are set to tighten further.  Such a low unemployment rate, along with an expectation for higher income growth, should keep distressed listings at relatively low levels.

Additionally, as we enter a period of higher interest rates, borrowers are generally well ahead of their mortgage repayments. The RBA has recently noted the median repayment buffer for owner occupiers with a variable mortgage rate had grown to 21 months of scheduled repayments in February 2022, up from 10 months at the start of the pandemic.  Even with a two percentage point rise in mortgage rates, the median repayment buffer would reduce back to 19 months, which is still substantial. With the median household well ahead of their mortgage repayments, the risk of households falling behind on their mortgage repayments is reduced.

Mortgage distress should also be minimised to some extent by mortgage serviceability assessments at the time of the loan origination. All borrowers would have been assessed to repay their mortgage under a scenario of mortgage rates being 2.5 percentage points higher than the origination rate, and since October last year, borrowers were being assessed at mortgage rates of 3 percentage points higher.

Under these serviceability scenarios, borrowers should be able to accommodate higher mortgage repayments costs, although such as rapid rate of inflation could create some challenges for borrowers with thinly stretched budgets.

As the housing market transitions towards softer conditions, we will be reporting on all the twists and turns in the market at the news and research pages of corelogic.com.au. 

Full transcript:

Welcome to CoreLogic’s housing market update for April 2022.

Nationally, housing values were up 0.7% in March, a subtle increase on the 0.6% lift recorded in February. The uptick in the monthly rate of growth was primarily driven by stronger conditions in Brisbane, Adelaide, Perth and the ACT, along with several regional areas, offsetting a slip in values across Sydney and Melbourne.

The first quarter of the year has seen Australian dwelling values rise by 2.4%, adding approximately $17,000 to the value of an Australian dwelling. To put the latest growth rate into some context, a year ago, values were rising at more than double the current pace, up 5.8% before the quarterly rate of growth peaked at 7.0% over the three months ending May 2021.

Sydney’s growth rate is showing the most significant slowdown, falling from a peak of 9.3% in the three months to May 2021, to 0.3% in the first quarter of 2022. Melbourne’s housing market has seen the quarterly rate of growth slow from 5.8% in April last year to just 0.1% over the past three months.

While the monthly rate of growth was up among some cities and regions, there is mounting evidence that housing growth rates are losing momentum. Virtually every capital city and major rest-of-state region has moved through a peak in the trend rate of growth some time last year or earlier this year. There are a few exceptions to the slowdown, with regional South Australia recording a new cyclical high over the March quarter and some momentum is returning to the Perth market where the rate of growth is once again trending higher since WA re-opened its borders.

With the softening in market conditions, the national annual growth rate of 18.2% has fallen below the 20% mark for the first time since August last year, after reaching a cyclical high of 22.4% in January. We are expecting the annual growth trend will fall sharply in the coming months, as the strong gains recorded in early 2021 drop out of the 12-month calculation.

National housing turnover is also easing, with preliminary transaction estimates for the March quarter tracking 14% lower than the same period in 2021, but still 12% above the previous five-year average. Nationally, the volume of housing sales is coming off record highs but there is some diversity across the capital cities in these figures as well. Our estimate of sales activity through the March quarter is 39% lower than a year ago in Sydney and 27% lower in Melbourne, while stronger markets like Brisbane and Adelaide have recorded a rise in sales over the same period.

Regional Australia continues to show some resilience to a slowdown with housing values across the combined regional areas rising at more than three times the pace of the combined capital cities through the March quarter. Regional dwelling values increased 5.1% in the three months to March, compared with the 1.5% increase recorded across the combined capital cities. The rolling quarterly growth rate in regional dwelling values has consistently held above the 5% mark since February 2021. 

The housing market trends have become increasingly diverse across the capital cities.

Sydney housing market conditions have continued to ease, with housing values posting consecutive months of decline in February and March to be only 0.3% higher over the March quarter. Ten months ago, Sydney housing values were rising at the quarterly pace of 9.3%. The weaker conditions can also be seen in less transactional activity, with our estimates of homes sales down almost 40% compared with the March quarter a year ago, albeit with some likely disruption from the latest wave of COVID and weather related events on housing activity. The number of homes available for sale has been trending higher as demand slows and the flow of new listings tracks at above average levels. At the end of March there were 7.5% more homes available for sale than at the same time a year ago, providing buyers with more choice and less urgency in their decision making. The latest data provides a further signpost that Sydney’s housing market is probably moving into the early stages of a downturn, following a 24.5% surge in values through the pandemic.

Melbourne housing values recorded a subtle decline in March, falling 0.1%, marking the fourth month in a row where housing values have been flat to falling. The weaker conditions come as advertised stock levels rise to be 8% above the previous five year average in March and estimated sales activity reduces to around 9% below the five year average. With higher inventory levels and less competition, buyers are gradually getting some leverage back. Homes are taking about a week longer to sell compared with last year, vendor discounting rates have picked up a little and auction clearance rates have faded to be consistently below the 70% mark. Across the sub-regions of Melbourne, five of the nine regions are now recording a negative quarterly change in housing values.

Brisbane remains Australia’s strongest capital city housing market, with housing values rising 2% over the past month to be almost 30% higher over the past year. In dollar terms, nearly $15,000 was added to Brisbane’s median value over the month of March. Although values are rising rapidly, the quarterly trend has eased a little, falling from 8.5% through the December quarter last year to 6.4% over the March quarter. Advertised inventory remains extremely tight across Brisbane, with total stock levels holding 42% below the previous five year average. At the same time, home sales through the March quarter were estimated to be 38% above the five year average. With demand outweighing supply each of the vendor metrics remains strong across Brisbane with a rapid median selling time, the tightest vendor discounting rates of any capital and auction clearance rates remaining well above the long term average.

Adelaide housing value rose another 1.9% in March, taking the median dwelling value to approximately $603,000. The monthly rise was the second highest gain of any capital city, after Brisbane. Annually home values are up 26.3%, adding roughly $125,000 to the value of a typical dwelling over the year. One of the key factors pushing prices higher is the ongoing shortage of advertised supply. Total advertised listings are more than 40% below the previous five year average, while total sales were estimated to be 53% above the previous five year average through the first quarter of the year. Part of the attractiveness of Adelaide is the relatively low housing prices. With a median house value of $658,000, Adelaide values are $745,000 lower relative to Sydney and $340,000 lower than Melbourne.

Perth housing values have recently shown a renewed growth trend, with the monthly growth rate lifting to 1% in March, the strongest monthly reading since May last year. The re-acceleration in housing values may be attributable to stronger internal migration rates as state borders reopen, along with the strongest jobs growth of any state over the past year and the most affordable housing prices of any state capital. The median value of a Perth house was recorded at $568,000 in March; $835,000 lower than Sydney’s median and $431,000 lower than Melbourne’s. Sales activity was tracking 9.1% higher than a year ago through the March quarter, while listing numbers were 10% lower than a year ago at the end of March.

Hobart housing values are continuing to rise, but at a pace that is well below recent highs. The March quarter saw home values lift 2.7%, which was above the national average of 2.4%, but down from the recent peak rate of growth when values were rising at the quarterly pace of 8.2% over the three months to July last year. Housing values across Hobart have surged by 72% over the past five years, by far the highest medium term growth rate of any capital city. The nearest capital, in terms of the five year appreciation in dwelling values, is Canberra, where values are up 55%. On the back of such extraordinary capital gains, housing affordability is becoming a significant challenge for a larger portion of buyers.

Darwin housing values were up 0.8% in March, taking the quarterly growth rate to 1.9%. The past year has seen values lift by 10.6% or roughly $48,000. Despite the growth, local values remain 13.3% below their historic high. Vendors have been taking advantage of the stronger market conditions, with the monthly trend in new listings surging over recent times. New listings added to the market in March were 38% higher than the same period a year ago and total listings were tracking 18% higher than last year. With advertised stock levels higher, homes are taking longer to sell and vendor discounting levels have loosened compared with a year ago.

The quarterly pace of growth in Canberra housing values has more than halved since a recent peak in August last year when housing values were rising at 7.3%. Since then the quarterly rate of growth has eased back to 3.1%, which is still well above the national average of 2.4%, but well down on the earlier highs. As housing conditions lose some steam, sales activity has also eased, down 21% in the March quarter compared with a year ago. The reduction in demand can also be seen in higher listings, with advertised stock levels now 5.3% higher than year ago.

The housing market has transitioned from an upswing generally characterised by a strong and broad-based rise across the regions of Australia, to one best described as multi-speed.

At one end of the spectrum are Australia’s two largest cities, Sydney and Melbourne, which are recording flat to falling housing values, while at the other is Brisbane and Adelaide, where the quarterly pace of growth continues to rise at an annualised pace of more than 20%. Perth too is re-accelerating off a low base, which can, at least partially, be attributed to state borders re-opening along with strong labour market conditions, and regional markets are mostly strong as population growth runs up against low available supply levels.

Despite the diversity, the outlook for housing remains skewed to the downside.

Rising fixed term mortgage rates and the prospect of higher variable mortgage rates later this year are only part of the reason why housing markets are likely to soften further as 2022 progresses. Other factors include worsening housing affordability, higher costs of living, higher supply levels and lower consumer sentiment.

With housing values rising so much more than incomes over the past two years, it has become harder for prospective buyers to access the market. The ratio of housing values to household incomes is at record highs across most of the capitals. Saving for a deposit and funding transactional costs is a significant hurdle for a growing number of prospective buyers.

Higher costs of living are also likely to weigh on housing demand. Higher inflation implies less disposable income and lower household savings which could make it harder for prospective buyers to raise a deposit and demonstrate their ability to service a new loan commitment. A surge in household savings through the pandemic has been a supporting factor for housing demand, however as the economy returns to the new normal, households are saving less; a trend likely to become more pronounced through the year.

On the supply front, both newly constructed dwellings and a rise in advertised listings is likely to gradually skew housing market conditions in favour of buyers, providing more choice and an opportunity to negotiate with less urgency around decision making.

Consumer confidence has taken a turn for the worse over recent months, with measures of sentiment falling to the lowest level in about 18 months. Historically, consumer sentiment and housing market activity have shown a close relationship. Below average sentiment, along with slowing housing markets and the prospect of rising interest rates, is likely to cause prospective buyers to think twice before engaging with the housing market.

However, there are other factors that should help to offset the downside risk.

A strengthening economy, low jobless rate and rising income growth should help to keep a floor under housing demand and keep the number of distressed listings to a minimum through a downturn.

A new round of incentives for first home buyers is another factor likely to support demand. In the lead-up to the federal election both major political parties have announced additional support for first home buyers in the form of an extension to low deposit home loan guarantees. Historically, first home buyers have reacted positively to stimulus measures.

Additionally, higher overseas migration is a net positive for housing demand. The most immediate flow through is likely to be seen in higher rental demand which could incentivise investors and, in the longer term, flow through to purchasing demand from permanent migrants.

With a federal election around the corner, we could see additional announcements relative to housing markets, and upcoming updates on inflation, labour markets and wages growth will provide some guidance about the timing of interest rate decisions. The CoreLogic research team will be keeping a close eye on the changing environment and what it means for housing markets via our research available at corelogic.com.au.

Full transcript:

Welcome to CoreLogic’s update on housing market conditions for March 2022.

CoreLogic’s national Home Value Index posted a 0.6% gain last month, taking Australia’s housing market into the 17th consecutive month of increasing values. While housing prices are still generally rising, the pace of growth in the national index has been easing since April last year. February’s growth of 0.6% marks the lowest monthly growth reading since October 2020 and is down from 1.1% in January and a cyclical peak of 2.8% in March 2021.

Every capital city and broad ‘rest of state’ region is now recording a slowing trend in value growth, albeit with significant diversity. Sydney and Melbourne have shown the sharpest slowdown, with Sydney posting the first decline in housing values since September 2020, while Melbourne housing values were unchanged over the month, following a similar relatively flat outcome in December and January.

Conditions are easing less noticeably across the smaller capitals, especially Brisbane, Adelaide and Hobart, where housing values rose by more than 1% in February.

Similarly, regional markets have been somewhat insulated to slowing growth conditions, with five of the six rest-of-state regions continuing to record monthly gains in excess of 1.2%. Over the past three months, housing values across the combined rest-of–state regions increased at more than three times the speed of housing values across the combined capital cities; 5.7% and 1.8% respectively.

Regional housing markets aren’t likely to be immune from the higher cost of debt as fixed-term mortgage rates rise. These markets are also increasingly impacted by worsening affordability constraints as housing prices consistently and substantially outpace incomes. However, demographic tailwinds, low inventory levels and ongoing demand for coastal or treechange housing options is keeping upwards pressure on housing prices.

Advertised inventory levels help explain the some of the divergence in housing growth trends. In Melbourne advertised stock levels are now above average, tracking 5.5% higher than a year ago and 4.7% above the previous five-year average. The trend is similar but not quite as advanced in Sydney, with total advertised stock 6.3% higher than last year but still 4.7% below the previous five-year average.  More choice translates to less urgency for buyers and some empowerment at the negotiation table.

The cities where housing values are rising more rapidly continue to show a clear lack of available properties to purchase. Total listings across Brisbane and Adelaide remain more than 20% lower than a year ago and more than 40% below the previous five-year average. Similarly, advertised supply across the combined rest-of-state markets was 24.9% below last year and almost 45% below the five-year average.

As housing conditions evolve we are seeing more diversity across each of the capital cities. 

Sydney home values recorded a subtle decline over the month, the first negative movement since September 2020. The 0.1% fall in Sydney home values could better be described as a levelling out, however the trend is pointing towards a further softening in market conditions. We will know over the coming the months if February marks the start of a downturn in housing values across Australia’s largest city. The unit market was the main driver of lower values, with values across this sector down 0.3% over the month compared with flat reading for house values. Analysing the trends by broad valuation cohort shows lower values are confined to the upper quartile of both the house and unit market over the month, following a period of substantially stronger growth through the upswing.

The growth trend in Melbourne housing values has levelled out over the past three months, with values down slightly in December before rising slightly in January and remaining unchanged in February. Over the, change in housing values over the past three months is just 0.2%, well down from the recent peak quarterly rate of growth recorded in April last year at 5.8%. Melbourne is facing some demographic headwinds, as more people seek out regional or interstate housing options along with advertised supply levels now tracking above the five year average. Weaker conditions are most evident across the upper quartile of the market where both house and unit values were down over the month, following a period of stronger performance.

Brisbane has once again recorded the highest monthly and quarterly pace of growth amongst the capitals, with dwelling values up 1.8% over the month and 7.2% higher over the past three months. The annual rate of growth is approaching the 30% mark, mostly fuelled by houses where values are 32.8% higher over the past year compared with a 14.4% lift in unit values. The South East Queensland market more broadly stands out as one of the strongest growth regions for housing values, with demand being fuelled by a high rate of interstate migration. While demand is well above average, advertised inventory levels remained almost 43% below the five-year average at the end of February.

Adelaide housing values continue to record one of the strongest growth readings across the country, with the market rising another 1.5% in February. Over the past year, the median value of a house has increased by roughly $143,000. Despite the significant rise in Adelaide housing values through the latest growth cycle, the median house value remains the third lowest of any capital, after Darwin and Perth, a factor which helps to explain the high demand for housing. Home sales over the past twelve months were estimated to be 36% above the previous five year average, while total advertised stock levels are estimated to be 44% below the five year average. This mismatch between advertised supply and demonstrated demand is the main factor pushing prices upwards at such as rapid rate.

Perth home values have gathered some momentum over recent month, albeit of a low base. The monthly rate of growth was easing through most of last year, culminating in a 0.1% monthly decline last October. Since that time the trend in growth has picked up to reach a rolling three month increase of 1.3%, the highest quarterly trend since July last year. With state borders now open, we could see some upside for Perth housing demand. House values are the lowest of any capital city, rental markets are relatively tight, listings remain below average and the economy is strong. With these fundamentals, the Perth housing market should be recording a higher rate of growth.

Hobart housing values were 1.2% higher in February, the 14th straight month where values have increased by at least 1% in month. Housing values are 26% higher over the year, with the unit sector returning a 29.5% gain compared with houses at 25.1%. Hobart is the only capital city where unit values have risen at a faster rate than houses. The stronger conditions in the unit sector are likely to be a factor of short supply while demand for holiday homes and downsizing options is likely to be high. Over the past five years, Hobart is averaging an annual capital gain of 11.3% which is more than double the national average at 5.3%.

Growth in Darwin housing values slowed sharply through the second half of last year, averaging a monthly growth rate of 0.4% between July and December compared with an average of 1.9% month on month growth between January and June. The first two months of 2022 have shown a similar trend, with Darwin home values up 0.4% in February following a 0.5% lift in January. Rents are showing a similar trajectory to housing values, keeping the gross rental yield firm around the 6.0% mark. The past year has seen housing values rise by 12.3%, which is the lowest of any capital city, however with such as high yield, the total return, which includes annual growth in housing values plus the annualised gross yield, places the Darwin firmly in the middle of the pack for overall housing returns.

The pace of growth in Canberra housing values has slowed, but the market remains in positive growth territory. House values were up 0.3% last month but unit values posted a stronger 1.0% lift, highlighting the recent stronger performance across Canberra’s unit sector that was previously lagging the growth rate for houses. With the median house value in Canberra now over the million dollar mark, we may be seeing some deflection of demand towards the medium to high density sector where the median value is almost $430,000 lower.

Since the onset of the pandemic in March 2020 Australian housing values have risen by 24.6% adding, roughly $144,000 to the value of an Australian dwelling. Such a high rate of capital gain in a period of low income growth can be explained by many factors, including:

• record low interest rates
• improved affordability following the 2017-2019 reduction in housing values 
• higher levels of housing sentiment
• a surge in household savings amid lockdowns
• an imbalance between demand and supply
• fiscal policies that supported or incentivised housing activity 

But each of these factors are losing their potency to drive housing values higher.

Fixed-term mortgage rates have been trending higher since early 2021, with the upwards trend sharpening through the December quarter last year. Variable mortgage rates are set to rise in line with the cash rate, probably later this year, which is likely to weigh on borrowing decisions. While mortgage rates are expected to remain well below average for an extended period of time, households are likely to be more sensitive to a higher cost of debt, considering housing debt ratios are at record levels.

Housing affordability has been eroded by the high rate of growth in dwelling values alongside low income growth. Between March 2020 and December 2021 wages increased 3.3% compared to the 22.6% lift seen in housing values. Not only does worsening affordability restrict access to the housing market, especially first home buyers, it also erodes housing sentiment.

Measures of housing sentiment have been reducing since November 2020, reflecting a mix of affordability challenges and rising mortgage rates. More broadly, consumer sentiment could be further negatively impacted by Russia’s invasion of Ukraine, triggering a new wave of global uncertainty. Consumer sentiment and housing market activity have historically shown a strong correlation, so if sentiment does trend lower we could see that denting housing demand.

The balance of housing supply and demand is also normalising. This trend is most advanced in Melbourne, where total listings are now above average, but also Sydney where listings are approaching average levels.

Additionally, the rollout of vaccinations and significant easing in social distancing restrictions is seeing increased foot traffic in cities like Sydney and Melbourne. As Australians cautiously emerge from social distancing, there is likely to be a shift in household spending and a slowdown in savings that may have previously supported gone towards a deposit on a home.

While the downside risks to housing are growing, there are some upsides that should help to insulate the market from a sudden downturn.

Open borders, both domestically and internationally, should support housing demand. While a return of overseas travel is not expected to boost home buying demand immediately, we are expecting stronger rental demand in key areas such as inner city precincts popular with foreign visitors and students. A lift in long term/permanent migration should provide a gradual boost to purchasing demand over time.

Improving economic conditions and higher wages growth should also help to keep a floor under housing demand and distressed property sales to a minimum.

Hopes that 2022 would deliver more certainty and less disruption are looking far-fetched at the moment, with the east coast of Australia encountering record levels of rainfall and extreme flooding, the invasion of Ukraine stoking global uncertainty and prospects for higher inflation and wages growth potentially forcing interest rates higher. Of course, we’ll be doing our best to measure the effect of all these factors on housing market dynamics. Youi can stay tuned to our research updates at corelogic.com.au.

Full transcript:

Welcome to CoreLogic’s housing market update for February 2022.

CoreLogic’s national measure of housing values rose by 1.1% in January, up 10 basis points from the December result, when the national index was up 1.0%, but well down from the peak rate of 2.8% in March last year. 

Five of the eight capital cities recorded a modest uptick in the monthly rate of growth, including Melbourne, which had posted a slight decline in values over December. Despite this, the quarterly change continued to soften, reflecting the longer-term trend of slowing growth across most regions of Australia.

Housing stock is thinly traded during January, so it will be important to monitor the trend as transactional activity picks up to see if this softening trend persists into the first quarter of 2022. The early indication is that housing markets are starting 2022 with a similar trend to what we saw through late last year. Values are still broadly rising, but nowhere near as fast as they were in early 2021.

A softening in growth conditions has been influenced by less government stimulus, rising fixed term mortgage costs and worsening housing affordability for those that don’t own a home. More recently, a slight tightening in credit conditions, and a surge in new listings through the final quarter of last year may have contributed to softer conditions.

The annual change in national housing values reached a new cyclical high in January, up 22.4% over the year; the highest annual rate of growth since June 1989. In approximate dollar value terms, the typical Australian home is now worth around $131,000 more than it was a year ago. Brisbane recorded the highest annual growth rate across the capital cities, with housing values up 29.2% or approximately $160,000.

Continuing a pattern seen over recent months, the January results showed greater diversity, with Brisbane and Adelaide leading the pace of gains, up more than 2% over the month, while growth in Melbourne, Darwin Sydney and Perth recorded substantially softer outcomes.

Regional markets have again recorded a substantially stronger result, with the combined regionals index up 1.8% over the month and 6.3% over the rolling quarter, more than double the pace of growth seen across the combined capitals over the same time frames.

Similar to the capital cities, it was regional Queensland and regional South Australia that led the pace of growth over the month, however each broad ‘rest of state’ region recorded a monthly gain of at least a 1.2%, demonstrating a depth of demand for regional housing. 

Regional Australia’s outperformance relative to the capitals has been a feature through most of this cycle to date, driven by a combination of higher demand and low levels of advertised supply.

Three of the eight capital cities are now recording a median house value over the $1 million dollar mark. Melbourne’s median house value surpassed $1 million for the first time in January, while Canberra recorded a median house value in excess of $1 million for the second consecutive month. In Sydney, the median house value is approaching the $1.4 million mark. 

With house values continuing to rise faster than unit values, the difference between the national median house and unit value reached a new record high of 28.3% in January. Further widening of this gap may see demand gradually deflect towards the more affordable medium-to-high density sector of the market, or towards more affordable detached housing markets, typically located around the outer suburbs of metro areas or regional locations.

The trends in advertised supply levels go a long way towards explaining the performance of housing values. Melbourne and Sydney have seen inventory levels normalising over recent months, taking some urgency out of the market as supply and demand become more evenly balanced. On the other hand, the situation in Adelaide and Brisbane, where advertised supply remains tight, is very different, Buyer competition amid low stock levels is a key factor supporting the upwards pressure on prices in these cities.

Although January is typically the quietest month for home sales, activity across the country was up an estimated 15% compared to January last year and almost 40% above the previous five-year average. Demonstrating the strength of demand across regional Australia, the January estimate of home sales was 58% above the previous five-year average while sales activity across the capital cities was estimated to be 27% higher than average. 

With market becoming increasingly diverse, lets drill down to the trends taking shape across each of the capital cities.

Sydney housing values were 0.6% higher in January, up from the 0.3% rise recorded in December, making January the third month in a row where housing values have increased by less than 1% month on month. A softening in the growth trend has been evident since April last year and can probably be attributed to a range of factors including thinly stretched affordability, a gradual rebalancing of advertised stock levels and rising fixed term mortgage rates. Houses are still recording a faster growth trend relative to units, although the performance gap has narrowed somewhat over the past six months. The slowing in value appreciation is being led by the more expensive end of the market, where at the peak of the growth cycle housing values were rising at 12.0% per quarter which has since slowed to a more sustainable 1.7% over the three months ending January. 

Melbourne’s housing market has recorded one of the lowest growth trends across the capital cities in recent months, posting a subtle 0.1% decline in housing values in December followed by a 0.2% rise in January. The past three months has seen Melbourne home values lift by 0.8%, the lowest rolling quarterly growth rate since the market emerged from the first round of lockdowns in November 2020. While house values have continued to rise at a faster pace than units, the performance between the two housing types has narrowed since October last year, potentially reflecting increased demand for housing in the more affordable but higher density sector of the city.  The upper quartile of Melbourne’s housing market has led the slowdown with the rolling three-month growth rate reducing from a cyclical high of 6.7% in April last year to just 0.1% growth over the three months to January. 

Brisbane has become Australia’s strongest capital city housing market with values up 8.3% over the most recent rolling quarter and 29.2% higher over the past twelve months. The quarterly growth trend for houses remains more than double that of units up 9.1% and 4.2% respectively. Brisbane unit values have finally overtaken the previous record high median value, set all the way back in March 2010, however relative to the larger cities, the local unit market remains very affordable with a median value around $458,000. Brisbane housing values are being pushed higher by persistently low stock levels against strong demand from both owner occupiers and investors, amplified by a high rate of interstate migration.

Monthly growth rates across Adelaide slipped from 2.6% in December to 2.2% in January. Despite this, the city continues to record one of the highest rates of value growth across the country with housing values up 7.4% over the rolling quarter and 24.8% over the past 12 months. The annual gain has added roughly $116,000 to the value of the typical dwelling resulting in a median dwelling value of approximately $585,000 in January. Unit values are up a much lower 9.5% over the year compared with house values which increased 27.3%. Adelaide’s strong growth is being supported by persistently low advertised stock levels which has added some urgency to the purchasing environment. In a demonstration of the strong selling conditions, we are seeing much greater proportion of properties being taken to auction rather than sold by private treaty. Despite the higher than normal auction volumes, the clearance rate across Adelaide held above 80% through the second half of January.

The pace of growth across Perth’s housing market remains relatively low, however the monthly trend rate of growth has re-accelerated since recording a slight dip in October last year. Arguably, the economic fundamentals look strong across Western Australia and advertised listings are lower than average which should be supporting stronger price growth. One potential explanation is that closed state borders have disrupted the demand flowing from interstate migration, which had showed a strong upwards trend to March last year, but weakened sharply through the June quarter. Housing remains relatively affordable across Perth, with values still 1.4% below their 2014 peak and a median house value that is the lowest amongst the capital cities.

Hobart housing values were 1.2% higher over January taking the annual growth rate to 27.6%, the second highest across the capitals after Brisbane. Hobart is one of the only capital cities where unit values have recorded a stronger annual growth trend than houses, up 32.8% and 26.3% respectively. Based on median value, Hobart is now the fourth most expensive city to purchase a unit, after Sydney, Melbourne and Canberra. The rate of growth is slowing, dropping from a recent high of 8.2% over the three months ending July last year, to 3.4% over the most recent three-month period. The unit market has recorded a sharper slowdown in the growth trend compared to houses, perhaps reflecting growing affordability constraints across the unit sector. 

The Darwin housing market noticeably softened through the second half of 2021 and into the first month of 2022. Housing values were 12.1% higher through the first half of last year, but over the seven months since June dwelling values increased by a much lower 2.8%. Houses have been the main drag on growth, with values virtually flat since June last year while unit values have risen a further 8.2%. There has been a sharp slowdown in the pace of rental growth as well, suggesting a broader demand side shortage may be at play. The quarterly rate of rental growth has slowed from a recent peak of 7.7% in March last year to just 0.2% over the three months ending January. 

Canberra housing values posted a 1.7% gain in January, the strongest month on month result since October last year. The jump in the pace of growth was mostly attributable to the detached housing sector where the monthly gain bounced back from 0.6% in December to 1.8% in January, while the unit growth rate eased from 2.1% to 1.3%. While the median house value has edged above the million-dollar mark over recent months, affordability is generally less of an issue in Canberra relative to other cities thanks to relatively high median household incomes. 

Overall, the housing market was still moving out of the seasonal slowdown following the festive period, but early indicators are showing housing market conditions are starting the year similar to where they finished in 2021. The pace of capital gains remains positive, but increasingly diverse and generally slowing.

The trend in advertised listings will be an important factor for housing markets performance in early 2022. In January, real estate agent activity across CoreLogic platforms was 22% higher than this time last year, suggesting the number of fresh listings could be higher over the coming month relative to previous years.

While new listings are likely to trend higher early this year, it is uncertain whether demand will keep pace. There are a range of factors that could weigh on housing demand including growing affordability constraints, tighter credit availability, rising interest rates and potentially an increasing level of caution amongst buyers wary of buying close to a market peak. 

If inventory levels rise and demand reduces, we should start to see vendors and buyers becoming more evenly balanced in the market, reducing the sense of urgency that has been a key factor in pushing up prices through the pandemic.

We may already be seeing this trend evolve in markets like Melbourne where total listings have returned to above average levels and the pace of capital gains has cooled.

We are expecting greater diversity in housing market trends this year. Labour markets, demographic patterns, supply levels and affordability will all play a key role in how housing markets perform around the country. The recent trends in housing values, listings and auction results have favoured the smaller capitals such as Brisbane and Adelaide where housing is more affordable and demand continues to outweigh advertised supply. 

Similarly, regional areas within commuting distance of the major capitals and those that offer a blend of affordability and livability are arguably well placed to outperform the broader market, although we are unlikely to see growth rates close to those recorded in 2021.

The trajectory of inflation and interest rates will be critical for housing markets. With higher than forecasted levels of inflation along with tighter labour market conditions, the prospect of rate hikes later this year is gaining consensus. A higher cash rate presents a clear downside risk for housing values. 

With so many moving parts and uncertainties, it will be as important as ever to keep up to date on the facts and figures influencing the housing market. We’ll be doing our best to keep you up to date throughout the twists and turns of the year ahead. You can stay tuned into the latest updates at the news pages of corelogic.com.au.