Australian home prices fell another 1% in January and are now down a record 8.9% from their high

Key points

• Australian national average home prices fell another 1% in January.
• Average national home prices are now down by 8.9% from their April high – resulting in the biggest and quickest fall ever in the period that CoreLogic data covers back to 1980.
• Average capital city prices fell another 1.1% and are now down by 9.6% from their April high – this is their fastest fall on record (back to 1980) and is approaching their 10.2% top to bottom fall seen in 2017-19.
• Rising mortgage rates remain the main driver of the slump and there is likely more to go. Since April a buyer on average full-time earnings with a 20% deposit has seen a 27% decline in their home buying power.
• We continue to expect a 15-20% top to bottom fall in home prices out to the September quarter, as the full impact of rate hikes flows through and as economic conditions slow sharply this year resulting in rising unemployment.
• Reflecting this we see around another 8% or so fall in prices out to around September.
• House prices are continuing to fall faster than unit prices, reflecting the much stronger earlier boom in house prices and as unit prices are relatively supported by better affordability and tight rental markets. And capital city prices are falling faster than regional prices. This is likely to remain the case.

The slump in home prices continues

Australian capital city average dwelling prices fell another 1.1% in January according to CoreLogic, making it their ninth monthly decline in a row. Including regional dwellings, which fell another 0.8%, national dwelling prices fell 1%. All capital cities saw prices fall again in January, although Perth and Darwin remain relatively resilient as both cities are still getting over their post mining boom slumps.

The key drivers of the downturn remain: poor affordability after the prior boom that saw prices rise nearly 29% from their pandemic lows; rising mortgage rates; a rotation in spending away from goods, including houses, back to services; cost of living pressures, making it even harder to save for a deposit; and poor homebuyer confidence. Rising mortgage rates are the biggest driver of the slump as the surge in fixed mortgage rates and variable rates has substantially reduced the amount new home buyers can borrow and hence pay for a home which has all weighed on demand.

While the pace of price falls slowed again in January to their slowest fall since June last year, it’s worth noting that past periods of property price falls experienced a few gyrations in the pace of price declines before prices ultimately bottomed, eg in the 2017-19 down cycle. See the next chart. And price falls remain relatively rapid in an historical context, even though their pace has slowed.

Source: CoreLogic, AMP

So far national average property prices are down 8.9% from their high and average capital city home prices are down 9.6% – both over nine months. This is the fastest pace of decline on CoreLogic records going back to 1980. And based on the same data it’s a record decline for national average prices and for capital cities its approaching the 10.2% record decline seen in 2017-19. The steepness of the decline likely reflects the speed of RBA cash rate hikes – which has been the fastest since the early 1990s – and heightened sensitivity to rising rates due to high debt levels, along with the extent of the prior boom.

Source: CoreLogic, AMP

Of course, it all needs to be seen in context as average home price levels have still only reversed about 45% of their surge from their pandemic lows. See the next chart. That said, Melbourne prices are now only just 0.4% above their pre-pandemic level.

Source: CoreLogic, AMP

Outlook – we continue to expect average property prices to have a top to bottom fall of 15 to 20%

We expect average property prices to fall further out to the September quarter as rate hikes continue to flow through and economic conditions deteriorate:

• the full impact of variable rate hikes has yet to be fully felt as it takes 2-3 months for RBA hikes to show up in actual mortgage payments;
• while we think the cash rate is near the peak, we now expect another 0.25% next week taking it to 3.35% and some economists expect the cash rate to rise above 4% with four more 0.25% hikes;
• increased lender funding costs (as eg banks repay cheap Term Funding Facility funds to the RBA) could result in mortgage rate hikes in excess of RBA cash rate moves – possibly adding another 0.25% to mortgage rates;
• two thirds of the 40% of households with a mortgage on fixed rates will see their mortgage rate reset from around 2% to around 5 or 6% by the end of the year. This is likely to result in a rise in mortgage stress and distressed selling – this is the so called “fixed mortgage rate cliff”;
• economic conditions are set to deteriorate this year as weaker global growth, rate hikes and cost of living pressures slow the economy & push up unemployment.

The combination will likely result in a further weakening in demand and a potential increase in supply as some financially stressed homeowners sell. In terms of the former, the next chart shows actual home prices compared to an estimate of what a buyer – with a 20% deposit, average full-time earnings and mortgage payments assessed at 28% of their income – can afford to pay for a home. The shift in mortgage rates from 17% in 1989 to record lows in 2020 around 2-3% was the main enabler of the surge in home prices and price to income ratios over the last three decades. In other words, record low mortgage rates were reflected in record high home prices relative to average income levels. While it can be seen from the chart that there are deviations and there are lots of other factors impacting home prices (supply, immigration, household size, taxation, help from “mum and dad”, home size and quality, and government incentives), over time home prices are tied to what people can afford to pay. But since April the amount an average new buyer can afford to pay has dropped by roughly 27% from around $600,000 to around $440,000. This demand side impact has been the key driver of home price falls so far, but suggests there is more to go even if the RBA stops raising rates.

Partly based on a Deutsche Bank analysis. Source: RBA, CoreLogic, AMP

In terms of financial stress, with the 3.1% cash rate household interest payments as a share of income are already estimated to be at a near ten year high. Given record debt levels, further increases in mortgage rates will start to push total mortgage payments (principal and interest) to record highs relative to household income. This is likely to result in a rise in mortgage stress – particularly as fixed rate loans reset this year.

As a result of these demand and supply side considerations flowing from higher interest rates, we continue to expect national home prices will have a top to bottom fall of 15 to 20% out to around the September quarter. With prices already down by around 9-10% from their high this implies another 8% of so fall yet to come from current levels. Late in the year a move towards rate cuts may enable home prices to start rising.

The main risks on the downside are that the RBA raises the cash rate to around 4% (as some economists are forecasting) and the economy enters recession. The RBA has already raised rates by more than the 2.5% interest rate serviceability buffer that applied up to October 2021. In this scenario home prices could fall by around 30% from their high.

On the upside several factors will help put a floor under prices and along with rate cuts eventually drive a recovery. These include: government support programs; the tight rental market; & rapidly rising immigration.

But for now, the property market will likely be dominated by higher rates. A pause in rate hikes on its own is unlikely to be enough to drive an upswing in prices as the capacity of buyers to pay will still be depressed. The last two major upswings in property prices that started in 2012 and 2019 required rate cuts before prices started to rise – see the purple ovals in the third chart in this note. Right now, we don’t anticipate rate cuts to start until late this year or early 2024.

Ends

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