With more hikes to the cash rate expected throughout 2022, homeowners and would-be buyers may be wondering how much further property prices could fall. New research shows that in the major capitals, property values could plummet by $200,000 - $300,000 in the next two years.

New analysis from RateCity of NAB’s Quarterly Australian Residential Property Survey shows house prices could fall significantly more by the end of 2023, especially in Sydney and Melbourne.

The median house price in Sydney could drop by $297,000 by the end of 2023 compared to the start of this year, to $1.12 million, if NAB’s property price forecasts are realised.

In Melbourne prices could drop by $207,000, bringing the median priced house to under $800,000 in December 2023.

How far could property prices fall?

Source: RateCity.com.au. CoreLogic.com.au, NAB Quarterly Australian Residential Property Survey Q2 2022

Brisbane, Adelaide and Perth are expected to weather the storm in 2022, if the NAB property price forecasts are realised. This is because in a higher-rate environment, interest rate hikes put downward pressure on more expensive property values first. But as you can see, by 2023 it could be a very different story outside of Sydney and Melbourne, with sharp decreases to property prices expected.

What impact will falling property prices have on first home buyers?

Seeing prices drop may be a welcome relief for first home buyers who have all but been shut out of the market over the last year because of the surging property prices. In fact, the latest ABS data shows there were 32% less owner-occupier first home buyers entering the market in May 2022 than in May 2021.

However, people who bought a property with a small deposit when prices were at their peak may owe the bank more than their home is worth, if prices fall as forecast. This is known as being in ‘negative equity’.

Sydney: how much of your property you own

Source: RateCity.com.au. CoreLogic.com.au , NAB Quarterly Australian Residential Property Survey

First home buyers, who took advantage of the federal government low deposit schemes, may be the borrowers most likely to be impacted.

For example, if someone bought a median-priced house in Sydney in December 2021 at the peak with a 5% deposit, they could owe the bank 15% more than the entire house will be worth by the end of 2023, if NAB’s property price forecasts are realised. This is despite the fact they would have been paying down their debt for 2 years.

Melbourne: impact of buying at the peak

Source: RateCity.com.au. CoreLogic.com.au, NAB Quarterly Australian Residential Property Survey Q2 2022

Borrowers in Melbourne may also find themselves in a similar situation. Even if they had a 10% deposit when they purchased in December 2021, they would owe the bank 8% more than the house is worth by the end of 2023.

What impact will falling property prices have on existing homeowners?

For anyone who bought many years ago, property price drops won’t have a huge impact on them. Ideally, they should own a decent proportion of their home and therefore have a lot of equity in their home.

If you bought a home during the peak, you could find your house worth less in 2023 than what you paid for it. This means your loan-to-value ratio (LVR) may be high, and if it’s above 80%, you won’t be able to refinance without paying Lender’s Mortgage Insurance (LMI).

If you are in this position, don’t panic. Prices do fluctuate over a 20-30 year loan term. If you are not looking to sell and you can still afford to make your mortgage repayments, it may be worth just riding out the drop as prices do tend to eventually go back up.

For households nervous about keeping up with their rising monthly repayments from higher interest rates, haggling with your lender for a better rate is one way to take the pressure off. Now is also a great time to review all your household bills and monthly expenses and see where you can get better deals and make savings.

Tips for people unable to refinance:

• Don’t panic – keep making your repayments: If you can still make your monthly repayments then falling equity is not a problem. In the long run, house prices may keep going up.
• Haggle for a better rate: If your bank is advertising lower rates on their website for new customers, call them and ask them to match. If you don’t ask, you don’t get.
• Review your other bills: Put your regular bills under the microscope to see where you might make changes, such as your energy, phone and internet packages.
• Ask for help early: Before you miss a mortgage repayment, call your bank and see what options you have. You can also call a financial counsellor for advice. The National Debt Helpline is: 1800 007 007.

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