Is the property market in a state of confusion?

It's been 12 years since Australian mortgage borrowers have experienced a similar string of cash rate increases. This is affecting some parts of the country more than others, which explains why we're seeing mixed results across the market.

Some buyers are being held back by the rising interest rate environment, while others see the reduced competition as the ideal purchasing window. Anecdotally, buyers are still erring on the side of caution, with many already pricing in future rate hikes into their budgets.

To make matters more confusing, stock levels are generally low so some vendors are achieving great outcomes, while others are facing multiple price reductions.

We see this as a sign that the market is recalibrating. The Reserve Bank of Australia believes most buyers and existing borrowers can afford the multiple rate increases. However, analysis by S&P Global Ratings suggests that while current mortgage arrears are low, this could change as the data starts reflecting the economic reality of rate hikes.

Micro Market View

Dwelling values

Like in most parts of the country, Melbourne property prices are still falling and were down by -1.1% to $774,531 in September 2022. The good news is that the rate of decline in September continued to slow from the -1.2% decrease in August and -1.5% in July, according to CoreLogic. It’s the second month in a row that Melbourne’s value decline has eased and all eyes will be on the October data to see if the trend continues.

 

Melbourne property price movements (month-on-month)

There’s more to be optimistic about. Melbourne experienced 17.3% growth in values (from trough to peak) during the COVID boom. Thanks to these significant gains, prices still need to fall a further -4.3% before they return to pre-COVID levels.

Additionally, while auction activity has been slower than the same time last year, Melbourne saw the strongest activity across the capital cities in the week ending October 9. The clearance rate has also picked up, with 66.1% of auctions in the city resulting in a successful sale – the highest rate since early May.

 

A housing market crash is very unlikely

Industry commentators have made all sorts of doomsday predictions. But we should remember how inaccurate many of these experts were when forecasting the pandemic property market. Plus, with so much of the country’s wealth tied to real estate, it’s unlikely that our governments and banks would allow the market to head in that direction.

The million-dollar question is how much will property prices drop? Our guess is as good as anyone’s. But here’s what we do know.

CBA recently reported that 78% of its mortgage borrowers are ahead on repayments by an average of 36 months, while 70% of NAB’s home loan customers are ahead. This suggests that many households have amassed substantial savings during the pandemic, placing them on a strong footing for any interest rate rises.

Across the country, property prices soared 33.6% between 2020-22, peaking in April 2022. Those who bought well before the peak are likely to be in a relatively comfortable position, with strong equity built up. This should help them withstand any rate rises and may even give them the upper hand when refinancing.

However, the concern is there for the buyers who bought in 2021 at the peak as well as those coming off fixed-rate terms as they face a ‘mortgage rate cliff’.

Working on the ground, our team sees changes to the market before it becomes a statistic. A common theme we’re hearing in our conversations with agents is the first sign of distressed sales coming through. A lack of supply, which is propping up prices and keeping a rather sharp retraction at bay.

But a supply shortage doesn’t mean vendors can to run a mediocre campaign and still expect a sale price well over expectations. In a buyer’s market, working merely with a sales agent may not be enough to secure the price of your dreams.

In our sales advisory work at Davidson Property Advocates, we make sure every aspect of a sales campaign is covered:

• property preparation
• choice of agent
• method of sale
• presentation advice
• marketing guidance
• neutral pricing assessment
• negotiation strategy.
  

If you get any of these factors wrong, numbers will drop, competition will be compromised, and achieving the price you deserve will be a struggle.    

Queensland Land Tax backflip

One of the most intriguing property stories to come out of the government policy space has been no other than the Queensland land tax.

Queensland Premier Annastacia Palaszczuk has shelved controversial plans targeted at investors who own properties in Queensland and any other state, impacting some Victorian investors. Under the abandoned plans, the state government would have charged land tax to property investors based on the value of all real estate holdings across Australia, not just in the Sunshine State.

Industry experts warned the proposed rules would have worsened the state’s housing crisis in Queensland, as it would disincentivise investment in the state’s property market. If a mass exodus of landlords were to happen, this would suppress the supply of rental accommodation – and force rents up.

Naturally, there was backlash from property groups, investors and even some tenants, which the government obviously couldn’t ignore. Market players across the country would have almost certainly breathed a collective sigh of relief at the backflip.

Coastal Focus

The coastal market peak has come and gone as we see more properties being listed off-market. Eroding affordability in these markets, as well as multiple rate hikes, has had an impact, especially on holiday homes. Some of these owners are realising that the second home is becoming more of a burden as interest rates continue to rise. Yet it’s also likely that many of these owners, generally in higher income brackets, would have significant financial buffers to see them through further rate rises.

We can’t forget that the rise of remote working, coupled with the sea change drive, has seen the Mornington Peninsula enjoy exponential growth during the pandemic.

But prices have moderated on the Morning Peninsula. While values were up by 9.7% in the past 12 months, the market saw a more subdued growth of 1.2% in the past 3 months, according to SQM Research.

Additionally, 99.1% of properties on the Morning Peninsula still sold for a profit in the 3 months to June, according to CoreLogic’s latest Pain and Gain report. The median profit recorded was $582,500. While it’s likely these significant gains will ease off in more recent data, we’re confident that the region’s strong lifestyle appeal will support ongoing demand.    

Economic Snapshot    

Implications to the economic outlook

The performance of the property market is hinged on what happens to our economy. While we’re facing some headwinds, there are reasons to feel some optimism.

The key factors that will determine where housing prices go from here are:

• interest rates - how fast they’ll rise and what the peak will be
• inflation - what the peak will be and when we’ll see it.
  

On the cash rate front, the RBA’s decision to lift the rate by a standard 25 basis points came as a surprise to many commentators. The central bank had been hiking the rate by 50 basis points between June and September, and the US Federal Reserve had raised its rate by 75 basis points in September.

CBA - the only major bank which correctly predicted the RBA’s October decision - expects only one more rate hike in November of 25 basis. This would see the cash rate peak at 2.85%. Despite calling out the risk of another hike of the same size in December, taking the rate to 3.1%, this is still well below the 3.9% peak markets are expecting.

Looking at inflation, the Australian Bureau of Statistics recently began tracking monthly consumer price index (CPI) data, which will help economists see inflation movements as it happens.

The latest monthly CPI indicator showed that annual inflation had eased, edging down from 7% in July to 6.8% in August. This may have contributed to the RBA’s October 25 basis point increase decision. But it should be noted that the RBA doesn’t expect inflation to return to the 2-3% target until December 2024, which means they’re not done with rate hikes.

The RBA and the broader market will no doubt be watching inflation data for the September quarter when it’s released on October 26 – giving the RBA 6 days to make an informed decision ahead of the November meeting.