House prices in Sydney remain more than 20% above pre-Covid levels despite rising interest rates, as economists warn housing affordability has “never been worse”.
After hitting record highs in January, Sydney house prices have dropped -1.5%, but remain 22.7% above pre-2020 levels, according to CoreLogic data.
Melbourne, which experienced a softer growth phase, has recorded a smaller decline of -0.8%, with housing values now 9.8% higher compared with the pre-Covid level.
Digital Finance Analytics’s Martin North said an increase in interest rates meant house prices were dropping – and they could come down by 20%.
“There is almost no possibility of home prices performing again as they have over the last 18 months,” North said.
“At very best they might wobble a bit and go sideways, but the most likely scenario is a fall of between 15-20% over two years. Obviously, it varies by location and property but 15-20% is feasible.”
Data from the Australian Bureau of Statistics this week showed the total value of residential dwellings hit $10.2tn for the first time, with the average price now standing at $941,900, up from $925,300 in the December quarter in 2021.
Australian houses are overvalued by about 40%, and while a correction might hurt investors, it is needed, North said.
“We need to wake up to the fact we can’t go on seeing property prices get further away,” he said. “Housing affordability has never been worse, a lot of people can’t get into the market without the bank of mum and dad, people have been wired and encouraged to get into property.”
He said governments needed to move the economy away from housing.
“If you go back 30 years, two-thirds of bank lending was for business investment, one-third was for housing. Today, more than two-thirds is for lending for housing, and only a third is for business investment.
“What we have done as a society and government is to tilt the economy so far towards housing that it’s almost a black hole sucking everything into it.”
The head of Australian economics at Commonwealth Bank of Australia, Gareth Aird, predicted house prices could drop by 18% in Sydney and Melbourne and 15% nationally.
“Home prices will move lower from here given the RBA is expected to tighten policy via rate hikes quickly,” Aird said. “The extent to which prices contract will depend in large part on the speed and magnitude at which the RBA lifts the cash rate.”
But not everyone is predicting a steep correction in the market.
Research fellow at Sydney University, Cameron Murray, said right now we were at the “Road Runner” moment where we had been chased off the edge of the cliff by Wile E Coyote and we were hanging by the air.
“It goes longer than you think. We are in that stage of the cycle. Property markets move slower than other markets and long-term investments – they are traded infrequently,” he said.
In the 1980s, interest rates increased from 1987 to 1989 and it took two years for it to have an impact on house prices, he said. And in the 2000s they rose for five years before it was seen in the residential market.
“When house prices do fall, it usually only happens when there is a major macro economic dislocation,” Murray said.
“What that means is that it doesn’t feel like a good time to buy, because you don’t want to own an asset that is falling in price, when you’re less confident about your job or getting a pay rise.”
Murray said the most important question was why it had to come down to tinkering with how much people were paying for their homes – instead of creating a stable housing market.
“Surely we can think of a better way to stabilise the economy than changing what people’s mortgages cost,” Murray said.
Mike McCarthy, the CEO of Barry Plant, said on the ground the market was slowly turning in the buyer’s favour.
“Auction clearance rates are a good lead indicator and generally if it’s a seller’s market the clearance rates sit above 70%, if it’s a buyers market it’s below 60% – we’re right in that 60-70% rate,” McCarthy said.
He said it was too early to feel the full impact of interest rates on the market, but they were seeing fewer houses go for 30% to 40% above the reserve.
“There is no doubt interest rates will have an impact, and the impact will be most keenly felt at the first homebuyer market,” McCarthy said.
“Obviously if there is an increase in supply, for sellers and vendors they need to be mindful of where the market is at, and make sure they’re not seduced by a high price. You don’t want to go in with high expectations if they are unrealistic.”
