Why are property values falling in Sydney and Melbourne?

Data recently released by the Australian Bureau of Statistics (ABS) and CoreLogic indicates that Australia’s property markets could be slowing down, to the point where Sydney and Melbourne are recording flat to falling housing values. So, what’s causing this downturn, and are these trends likely to continue in the future?

What does the data say?

The most recent Lending Indicators report from the ABS shows that the value of new housing loan commitments fell 3.7 per cent in February 2022 following a record high in the previous month.

Falls were recorded for both owner-occupier and investor lending, with the number of new loan commitments to owner-occupier first home buyers falling 8.3 per cent over the month, or 36.7 per cent lower compared to a year ago. The largest falls in owner-occupier first home buyer commitments were recorded in New South Wales (down 15.5 per cent), Victoria (down 5.9 per cent) and the Australian Capital Territory (down 31.9 per cent).

According to CoreLogic’s Home Value Index (HVI), Sydney’s property value growth rate fell from a peak of 9.3% in the three months to May 2021 to 0.3% in the first quarter of 2022, while Melbourne’s housing market has seen the quarterly rate of growth slow from 5.8% in April last year to just 0.1% over the past three months.

CoreLogic’s research director, Tim Lawless, said that “the sharpest slowdown has been in Sydney, where housing prices are the most unaffordable, advertised supply is trending higher and sales activity is down over the year.”

Mr Lawless added that the annual growth trend will fall sharply in the coming months, as the strong gains recorded in early 2021 drop out of the 12-month calculation.

However, Mr Lawless also noted higher stock levels of properties to purchase in some markets, with Melbourne’s total advertised supply 8 per cent above the previous five-year average towards the end of March, and the number of homes available to purchase in Sydney at 7.5% higher than a year ago and only 2.6% below the five-year average.

“With higher inventory levels and less competition, buyers are gradually moving back into the driver’s seat. That means more time to deliberate on their purchase decisions and negotiate on price,” Mr Lawless said.

What’s slowing down Australian property?

According to CoreLogic, some of the factors that could push property prices further downward include:

• Interest rates: Fixed rates have recently been rising, and variable rates could also start rising when the RBA increases the national cash rate, which could come as soon as June 2022.
• Affordability: With property values outpacing wage growth, it has become harder for many prospective buyers to access the market.
• Inflation: Higher costs of living could mean less disposable income and lower household savings, making it harder for borrowers to save a house deposit.
• Higher supply: Both newly constructed dwellings and a rise in advertised listings is likely to gradually skew housing market conditions in favour of buyers, providing more choice and an opportunity to negotiate with less urgency around decision making.
• Sentiment: Consumer confidence readings from ANZ and Roy Morgan have fallen to the lowest level in about 18 months, which could lead prospective buyers to think twice before engaging with the housing market.

What could help halt the slowdown?

According to CoreLogic, some of the factors that could help offset the downside risk include:

• A stronger economy: A low jobless rate and rising income growth could help to maintain housing demand and limit the number of distressed listings.
• New housing incentives: The expansion to the First Home Loan Deposit Scheme FHLDS) and other related measures that were recently announced in the federal budget could provide extra support for first home buyers.
• Migration: With overseas migration set to return, this could lead to higher rental demand in the short term and higher purchasing demand over the longer term.

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