Why house prices fell so fast, and when the falls could stop

September 15, 2022
Posted in News
September 15, 2022 veps


The power of rising interest rates to push down house prices has been laid bare in a new graph that shows property values fell within weeks of the first hike to hit Australia in a decade.

Property values were still rising across the combined capital cities in the first months of this year, CoreLogic’s daily home value index showed, albeit at a modest pace as the pandemic property boom petered out.

The first rate rise in May, to 0.35 per cent, had an immediate impact. Values that had been rising at a pace of about 0.3 per cent a month during autumn started to drop into negative territory, the data shows.

After four more interest rate rises to 2.35 per cent, the latest figures show values across the capitals are now down by almost 5 per cent from their peak.

Experts expect more price falls as interest rates continue to rise and the Reserve Bank offers little indication about how much higher rates could go. Some bank economists are predicting rates could get as high as 3.35 per cent before edging lower next year.

CoreLogic research director Tim Lawless said interest rate rises have been the main driver of falling house values, and the new data shows how quickly they started to fall after the first jump in rates.

“It looks like the market was quite sensitive to the interest rate rises … Sydney and Melbourne’s markets were already slowing, but there was an inflection point after a couple of weeks in May,” Lawless said.
“We have seen the decline accelerating, but it appears the rises in August and September have not had as much of an impact as at the start.”

Sydney’s house value falls led the country, down 7.6 per cent between May and September, while Melbourne’s dropped 4.9 per cent over the same time. Brisbane, where values were still rising as other capital cities started to fall, is now showing a sharp drop in values, down 2.9 per cent over the past two months.

Though house values have been falling since earlier in the year, the rate of growth had been slowing since last year, Lawless said, when fixed interest rates began to rise, and the Australian Prudential and Regulation Authority reduced the maximum amount that buyers could borrow.

Wheatley Finance owner and mortgage broker Andrew Wheatley said the calls for refinancing or renegotiating loans have become more desperate from clients over the past few months.

Though many had been getting in touch before the rate rises to try and get a better deal, the messages he was receiving were becoming more urgent.
“There’s a lot of people just getting in touch saying ‘my mortgage payments are getting out of control and I need to talk to someone’,” Wheatley said.

What I’ve [also] noticed in the last three or four months is that people don’t rush in and snap up property quickly,” he said. “Before they had to rush in and buy because the longer it took, the more prices would rise. Waiting six months could cost a buyer an extra $50,000.”

Buyers advocate Cate Bakos said buyers were jittery about the interest rate rises since they began in May, as many realised they qualified to borrow less from the banks and feared stretching themselves too far financially.

“The fear has been elevated by interest rate rises, especially for people that haven’t experienced them before,” Bakos said. “A lot of nervous buyers are applying their own caution and their own buffers, they’ll say ‘the bank said I can borrow $1.6 million, but I don’t want to go over $1.3 million’.”

Commonwealth Bank’s head of Australian economics, Gareth Aird, said more property price falls could be expected as interest rates continued to rise.

“House prices will keep falling until rates stop rising,” Aird said.

Loan values have also taken a hit. Australian Bureau of Statistics data from July revealed loans for residential property had dropped by 8.5 per cent, after a fall of 4.4 per cent in June, he said.

Aird has predicted prices across the country will fall 15 per cent peak to trough during the downturn, while other banks, including ANZ, anticipate prices will fall 18 per cent.

“That’s conditional on rates going up another 50 basis points – so by 25 basis points in October and 25 in November,” Aird said. “If it goes up higher it could change predictions – no one knows how high they’ll take the cash rate, including the RBA themselves, that will determine how far house prices will fall.”

Source: the Sydney Morning Herald