Residential property values are going backwards in major capital cities and the outlook for the next 12 months is flat at best. Buyers can afford to sit tight as they may find better value going forward in markets offering more supply and reduced competition.

The national weighted median price for houses fell from $471,300 in the December quarter to $458,488 in the 2008 March quarter, a decline of 2.7 per cent, according to the Real Estate Institute of Australia and Mortgage Choice. The median price for flats, units and town houses also fell by 2.7 per cent over the quarter to $355, 297. Houses and apartments have recorded their biggest quarterly falls in five years. Melbourne’s median house price dropped to $432,500 in the March quarter, a fall of 8.4 per cent on the previous three months. Sydney’s median house price for the March quarter is down 0.3 per cent to $554,000, Perth declined 2.5 per cent to $460,000 and Canberra dropped 6.8 per cent to $445,000. Adelaide is up 2 per cent to $362,100, Darwin lifted 1.8 per cent to $420,000, Brisbane is up 1.6 per cent to $416,500 and Hobart grew 1.5 per cent to $335,000. Hobart remains the cheapest capital city for buying residential property. The median price for apartments in the March quarter fell in every state except the Northern Territory and Queensland. Sydney and Perth are the only two capital cities to record a median house price above $450,000 in the March quarter, as opposed to four capital cities in the December quarter.

REIA president Noel Dyett says: “People are being bombarded every day with uncertainty over inflation, interest rates, the cost of food and petrol and, as a result, the housing market is beginning to suffer. Unfortunately investors, as well as owner-occupiers are showing reduced levels of confidence. The uncertain economic conditions are affecting prices for houses and other dwellings.” Housing affordability is at an all time low, and Dyett says 38 per cent of average family income is needed to meet mortgage repayments. Despite residential property rising in some capital cities, Dyett says “the growth was marginal and nothing like that experienced during 2007”.

Median house prices rose by 8.3 per cent and other dwellings by 8.2 per cent in the past 12 months, but the trend is clearly reversing. Dyett says he’s expecting property values to fall further in the June quarter as interest rate rises in February and March start to bite. “House prices are getting softer and I expect that trend to continue,” Dyett says.

RP Data, a leading supplier of commercial and residential property in Australia, says potential buyers have more time to research the market, select appropriate properties and negotiate on purchase price. RP Data director of property research, Tim Lawless, says the 12-month capital growth outlook is flat, resulting from the supply of existing stock for sale exceeding demand under the weight of higher interest rates. “What we have is a supply imbalance – an over-supply of existing dwellings for sale and too few buyers,” Lawless says. “It will take time to correct the imbalance and for buyers to soak up the stock.” An RP Data statistic released in May revealed that in the past month, the total number of residential listings for sale in the Australian market has averaged 130,280 each week. During the same period last year, the weekly average was 73,570, or 77 per cent fewer residential properties listed for sale across Australia. “There is a lack of confidence in the market and, with fewer buyers, sellers have to be more realistic about price,” Lawless says.

And, what we also have is an uncomfortably high inflation rate outside the Reserve Bank target range of 2 to 3 per cent. Households struggling to meet higher mortgage repayments are also being hit by higher fuel and food prices and cost-of living expenses putting upward pressure on inflation.

Property experts say interest rates are they key. Over-stretched borrowers will be forced to sell if rates continue to rise in response to fighting higher inflation. This will generate more supply of existing stock for sale and push housing prices down. And that’s when potential buyers may step in and correct the imbalance. What potential borrowers should also factor in is the interest rate lag as it takes time for movements, either up or down, to filter through the economy. The RBA cash rate target has risen 12 times, from 4.50 per cent to 7.25 per cent, since May, 2002.

And this has not been lost on homeowners in Sydney’s western suburbs, where over-stretched borrowers have been forced to sell into a falling market. The Housing Industry Association says property prices in Sydney’s western suburbs have fallen between 5 and 10 per cent in the past 12 months. And prices do not look like recovering any time soon. Ben Phillips, HIA assistant director of industry and policy, says the residential property market in New South Wales, and particularly in Sydney’s west, is a “basket case”. Phillips says even a major capital city recording modest capital growth is a fall in real terms when rising wages and the Consumer Price Index are taken into account. “A steady housing market is, in effect, a retreating housing market,” Phillips says.

HIA statistics show that new home sales so far this quarter are failing to recover from a very first weak quarter in 2008. Sales were down during the three months to April in four of the five mainland states. HIA chief economist Harley Dale says: “The impending 2008/09 financial year will be a flat year at best for new residential construction, without contemplating further interest rate rises.” Housing finance figures released in March show a 6.1 per cent fall in loans to 59,371, the first time the number had fallen short of 60,000 since the start of 2006. Even April’s building approvals rise of 7.8 per cent for dwellings was greeted with caution, considering a 5.5 per cent decline in March. CommSec’s response on June 3 to the April rise was: “Clearly the housing market is still going nowhere.”

What also concerns the HIA is that a shortage of new stock is putting even more pressure on a very tight rental market with low vacancy rates and climbing rents. The number of new dwelling starts across Australia has fallen from almost 174,000 in 2003 to 150,000 last year.

What is needed to stimulate the property market is an interest rate cut, according to Lawless, of RP Data. He says buyers want “more certainty”, and in the absence of it, they will sit on the sidelines.

A return to more stable global credit markets may also help. Apart from higher interest rates keeping buyers out of the market, so is the reduction in available funding resulting from the US sub-prime crisis. It’s simply harder to get credit during a credit crunch and this is contributing to falling housing prices, particularly in cities and regions where properties over-shot in previous booms. Property consultant Monique Wakelin, a director of Wakelin Property Advisory, says high levels of home ownership will sustain viability and stability in Australia’s property market. But capital growth in major cities is taking a breather under higher interest rates and inflationary pressures.