What has happened to Australia's property market? A lot, is the answer

Just over one year ago, Australia’s property market was on a massive high. The pandemic property boom was in full swing, appearing inexplicably unstoppable as Australians fell over themselves to pour a seemingly endless stream of money into real estate.

Across the nation, armed with record low interest rates and a manic-sized dose of Fear of Missing Out (FOMO), Australians fuelled price rises not seen since the likes of, well, ever. The national median price for a house hit $1.066 million. Sydney’s house prices rose by $1100 a day. Just to repeat: $1100 a day.

Smug sellers quickly became desperate buyers. Lots of records were broken and the skyrocketing prices were, depending on your circumstances, either something to be despaired, or a massive financial windfall.

But the saying “nothing lasts forever” was not coined from fiction.

A property cycle is exactly that – a cycle – and while the craziness of 2021 will go down in history as a once-in-a-generation property boom (which, by the way, continued well into 2022 in five of the eight capital cities), that pace of growth was not sustainable.

Which gets us to now.

Understanding the property cycle

Firstly, there is an affordability ceiling. People get to a point where they simply – no matter how much they beg, borrow or steal – cannot keep paying more.

Canberra and Melbourne started to show signs of this fatigue first, and research from the Domain End of Year Wrap shows that those housing markets peaked in December 2021.

Other cities, like Sydney, Brisbane, Adelaide, Perth and Hobart, continued to get even more expensive, albeit at a slower rate, throughout 2022, each market peaking at different points.

But inflation became a problem in 2022. Groceries, petrol, rent and childcare got more expensive very quickly.

A combination of factors, including the federal government’s stimulus packages like Home Builder, a surge in spending as Australians joyfully embraced life after COVID-19 lockdowns, and a hangover of supply issues that began during the pandemic, were exacerbated by the war in Ukraine, and by May, inflation had surged to a 20-year high.

Introducing … interest rate rises

And so, the Reserve Bank pulled the only lever it has to reign in inflation, and interest rates went up. The official cash rate was raised by 0.25 percentage points in May – the first rise in nearly 12 years – to 0.35 per cent.

The rate then kept going up. And up. The RBA moved aggressively, hoping to get on top of inflation quickly, and nine consecutive rate rises later, Australia’s official cash rate stands at 3.35 per cent. It’s tipped to rise again, by another 0.25 per cent, next week.

As far as interest rates go, historically, it is a paltry figure, and as anyone who owned a home in the 1980s has been quick to point out, a world away from the 17 and 18 per cent-esque rates others have endured.

But it has been the fastest tightening cycle in more than 30 years, and people borrow more now. Not because they are more frivolous than previous generations but simply because property costs so much more, even for an entry-level home on the outskirts of a city, even for a home in our regional towns.

Some of the biggest price rises in the entire nation during the pandemic boom occurred in regional locations. There isn’t a region in Tasmania that hasn’t risen by at least 20 per cent in the past 12 months. In the past five years, most prices have doubled.

Regional Victoria, NSW and south-east Queensland, particularly the Gold and Sunshine Coasts, have seen eye-watering price rises.

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Recent analysis found that someone who was servicing a home loan principal of $600,000 on a 1.95 per cent interest rate in April 2022, paying $2203 in repayments a month, could see their interest rate hit 5.95 per cent by May 2023, costing $3578 in repayments a month.

That’s an extra $1375 a month to find in the household budget, every month – and that’s happened within the space of one year.

The impact of interest rate rises on property prices

Unsurprisingly, nine consecutive interest rate rises have taken their toll on Australia’s property market.

At first, it was a softening in our largest capital cities, then it spread geographically, and prices stalled in other capital cities and in regional areas.

Buyers started to hold back and sit on the fence, uncertain of how the market would unfold and also knowing that – for the first time in more than two years – they had the upper hand.

They could wait, ruminate, and bide their time. So they did, and the supply of property for sale increased. Not because there was a rush of buyers needing to sell in a falling market but simply because property was no longer turning over at the high rates it had been only months earlier.

The shock of interest rate rises was far more material than just sentiment though. With each interest rate rise – and remembering the RBA handed down double hikes of 0.5 percentage points in June, July, August and September – potential buyers watched their borrowing capacity fall.

“The problem for the property market is the amount of money a new borrower can raise to buy a house is substantially less than it was [in early 2022],” says Shane Oliver, AMP Capital’s chief economist.

“In some cases borrowing power is 25 per cent less.”

When people cannot borrow as much, they cannot pay as much. Very quickly, prices softened, auction clearance rates weakened, and sellers lowered their prices.

By the September quarter, house prices were falling in every capital city bar Adelaide, where prices flattened.

Nationally, house prices fell 4.9 per cent from the March 2022 price peak, down about $53,000.

Domain’s chief of research and economics, Dr Nicola Powell, says it was a “roller coaster” period for property.

“The past two years have been fascinating to watch in real estate. After soaring price growth in 2021, it was inevitable that we would see an adjustment phase of the property cycle in 2022,” she says.

What goes up, always comes down – but perhaps not by as much

Here’s where some perspective is important. While it may feel like the property market has done a complete 180, in reality, it’s way off that.

Even after losing $53,000 from its price peak last year, the national median house price is still 25.4 per cent – about $204,000 – higher than it was before the pandemic boom.

Adelaide is about 45 per cent higher – or about $242,000 more expensive – Canberra is 51.3 per cent, or $320,000 higher, and Sydney is 24.2 per cent higher, or $275,000 more expensive.

In fact, prices in every single capital city are still significantly higher now than they were before the pandemic boom began.

This is because, historically, property booms have been far more supersized than downturns. In other words, Australia’s house prices tend to go up a lot more than they go down.

Domain analysed almost three decades of data and found that Australia’s prices don’t actually go through wild boom and bust phases. Instead, Australia tends to see a period of gains (quite often surging), followed by a slight decline or flatlined pricing.

The average upswing generally spans 2.75 years, with a 32.7 per cent price rise, from peak to trough, while on average, downturns experience a 3 per cent price decrease over 0.75 years (or just several months).

Powell says it’s important for buyers and sellers to keep this in mind, especially during times of uncertainty in a downturn, and to take a longer-term view.

“It’s about maintaining an overall perspective … it’s not timing the market, it’s the time spent in the market that counts,” she says.

“While property prices will continue to soften in 2023, it is unlikely they will erase all the growth seen during the pandemic boom.

“Initially, rate hikes were a huge shock to potential buyers in 2022, but now buyers have adjusted to this new norm and are more mindful of their lower borrowing capacity.”

Green shoots ahead?

Agents say buyers and sellers have modified their expectations, and the market has now settled back into a more “normal” state rather than the frenzied state it was still in in the early months of 2022.

“What we’re experiencing now is a normal market. When I say that, I mean a normal market where you’re promoting a property, getting the buyers through, and instead of having all of that competition vying for one property and potentially those buyers offering more to secure it. Now, it’s more in the negotiation phase. It’s a normal negotiation,” says Dianne Clarke of Belle Property Redcliffe.

The latest quarterly Domain House Price Report showed Australia’s property downturn has begun to slow, and the steep price falls recorded in September last year have eased off to smaller quarterly declines, even stabilising in some cities.

Only Sydney, Brisbane and Canberra fell over the December quarter, while house prices in Melbourne, Adelaide, Hobart and Perth edged upwards. House prices in Darwin increased by 3.3 per cent.

The number of properties being listed for sale has fallen. That shortage of homes for sale has increased competition among buyers who are out to purchase now, which has so far  put a floor underneath prices.

Powell says that although it’s likely the depth of this downturn will be shaped by how high interest rates go, rates are not the only factor influencing the property market.

“Tax settings, banking regulation, population and income growth, and the responsiveness of new housing supply to growing demand all make an impact,” she says.

As the market continues to adjust to its new normal, Powell says new opportunities will emerge for buyers, particularly those looking to upgrade or buy in their dream neighbourhood.

“I expect a multi-speed market will become more apparent in 2023 with some areas falling faster, while others will be more resilient.

“Overall, entry-priced houses and units will hold firmer, particularly in the most expensive capital cities, Sydney and Melbourne. This will be driven by the affordability barriers of purchasing, first-home incentives and deteriorating borrowing capacity steering demand to more affordable options,” she says.

“This, coupled with the houses at the premium price point seeing greater falls, will create opportunities for upgraders.”