John McGrath – How the market is responding to today’s changing economy
The current downturn is one of the faster-correcting markets I've seen in my 40 years in real estate.
New figures released by CoreLogic last week show "the rate of decline is comparable with the onset of the global financial crisis in 2008, and the sharp downswing of the early 1980s".
If you missed the numbers, here they are.
How house prices changed in July
- Sydney house prices down -2.5% (down -5.3% over May, June & July)
- Melbourne house prices down -1.6% (down -3.7% over May, June & July)
- Brisbane house prices down -1.1% (down -0.3% over May, June & July)
- Canberra house prices down -1.4% (down -1.5% over May, June & July)
- Hobart house prices down -1.2% (down -1.3% over May, June & July)
- Adelaide house prices up 0.3% (up 3.4% over May, June & July)
- Perth house prices up 0.2% (up 1.2% over May, June & July)
- Darwin house prices up 0.2% (up 1.9% over May, June & July)
Source: Hedonic Home Value Index, CoreLogic, published August 1, 2022
I think the current market drop reflects borrowing rates.
Rates will increase to around 5.5%. If rates go much higher, the market will be hit harder as a result.
Historically, Australians have paid an average of around 7% for mortgage interest rates so it's not as much the real level of current rates but the rapid increase from where we were six months ago.
Interest rates are rising because inflation is rising. The latest annual inflation number is 6.1%. That's the highest it's been for more than 20 years (since the introduction of the GST).
So far, the property market has reacted in a number of ways:
- Prices are starting to fall in previously strong markets like Sydney, Melbourne, Canberra and Hobart
- Auction clearance rates are falling as buyers become more wary of their budgets
- We are not seeing any panic selling, and this is backed up by CoreLogic data. This is probably because Australians saved a lot during the pandemic, as they didn't travel or go out for meals or leisure during lockdowns, and many households received generous government stimulus payments. So homeowners appear to be coping with rising inflation and rates by reducing their personal discretionary spending, not selling their assets
- Unemployment is 3.5%, the lowest level since 1974, and job security is the key to a stable housing market because it means people can continue to make their mortgage repayments
- Rents are increasing due to low supply and high demand. Dwelling rents are up 9.1% across the capital cities and 10.8% across the regions compared to June 2021, according to CoreLogic. A rising number of migrants coming into Australia is adding to rental demand
I think we've already seen the majority of the price reductions due this cycle but it may get a little worse before it plateaus, perhaps another 3-5%.
Overall, buyers have received a large and immediate discount from the recent peak. So while I don't see a huge rush for buyers to jump in before prices rebound, the window of opportunity won't last forever.
Buyers who missed out last year should take advantage of the market taking a breather within the next 12 months.
The ASX 200 rallied 5.75% in July after an 11.75% decline over the first six months of the year. Share markets are inherently forward-looking, so investor sentiment tends to be ahead of real economic changes. So, the improvement in July is quite interesting.