‘In their stride’: Why property prices might not fall as far as feared

First-home buyers are retreating as average mortgage values soar.

First-home buyers are retreating as average mortgage values soar. Photo: TND

Australia’s housing correction may not be as bad as feared as buyers take rising interest rates “in their stride”, a leading economist says.

CoreLogic figures published on Monday showed national average house prices fell for the third month in a row in September, down 1.4 per cent, with Sydney and Brisbane leading declines.

But the property price plunge was smaller than the 1.6 per cent fall in August, a sign that the market is showing resilience and could even return to price growth much earlier than forecast.

Veteran housing economist Andrew Wilson said the data shows that buyers have begun to take rising interest rates “in their stride” after the shock of the Reserve Bank’s first hike in May.

He said gloomy big bank forecasts that Australian property prices would plunge more than 20 per cent over the next 18 months as rates rise were much less likely to occur.

“Auction markets have been reasonably resilient, clearance rates are higher than many have expected, and that represents a more balanced market between buyers and sellers,” he said.

High value houses hit hardest

House prices are likely to continue declining for some time – at least until 2023, according to CoreLogic research director Tim Lawless.

“It’s possible we have seen the initial shock of a rapid rise in interest rates pass through the market and most borrowers and prospective home buyers have now ‘priced in’ further rate hikes,” he said.

“However, if interest rates continue to rise as rapidly as they have since May, we could see the rate of decline in housing values accelerate once again.”

What’s interesting though, is that high-value homes have absorbed most of the market downturn.

Properties at the top end of the market lost 3.8 per cent of their value on the year to September, while the cheapest 25 per cent of houses were still about 12.8 per cent higher in the same period.

Dr Wilson said high-value markets like Sydney and Melbourne led the property market rise during COVID-19 and were now leading price falls as the market corrects amid rising interest rates.

Recovery on the horizon

The question for the market now is whether interest rates will continue rising at a rapid pace.

If they do, price declines are likely to be larger and last longer because the borrowing power of buyers will be much lower than it otherwise would be.

Would-be buyers have already seen the amount they can afford decline by about 20 per cent, according to the latest RBA figures.

The RBA is slated to hand down its sixth rate hike in a row on Tuesday, but is widely expected to begin slowing the pace of increases as its target enters the so-called “neutral zone” – that could temper any further falls in property prices.

And with inflation forecast to peak in coming months, Dr Wilson thinks the housing market could move back into positive territory early next year.

“We’re not in positive territory yet, but this [latest data] provides speculation that we might move back into positive territory early next year,” he said.

Analyst sentiment on the housing market is being buoyed by resilient auction numbers, with buyers remaining in the market despite rising rates making it harder to secure loan approval.

CoreLogic figures published on Monday showed auction clearance rates were 62.3 per cent over the weekend, which is far below pandemic highs but still above long-term averages.

But it remains to be seen how far headline prices will fall from pandemic highs, with major banks earlier this year predicting that nearly all of the growth seen since early 2020 could evaporate.

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