Where to from here for house prices?

• In Australia, the house prices have gone down from their peak and this might seem like a mild decline compared to other advanced economies.
• In New Zealand, the home values have dropped significantly, while Sweden’s house prices have also decreased dramatically.
• Despite this, Australia’s housing slump has surpassed the previous record in peak-to-trough declines, and the current downturn has only been happening for nine months.

The sudden drop in Australian home values has come as a surprise. Although it is part of a global trend towards higher inflation and higher interest rates, the Reserve Bank of Australia (RBA) has received criticism for not accurately predicting the timing of their rate-raising cycle.

The RBA tightens their rates cycle

Recently in September 2021, the RBA suggested that interest rates would not rise until 2024, however, they abruptly increased borrowing costs which has impacted one of the most vulnerable housing markets in the world. Australia, with a high household debt-to-income ratio and a significant number of mortgage borrowers facing a refinancing cliff, is especially sensitive to rising rates.

Sydney, one of the most overpriced property markets in the world, has experienced a sharp decline in prices and a decrease in sales. Brisbane has also faced similar difficulties with prices down and a decrease in transactions.

During the early stage of the Covid-19 pandemic, cheap money encouraged many borrowers to take out fixed-rate loans, which were cheaper than the standard variable-rate mortgages. The increase in fixed-term lending has now become a concern as data from the RBA shows that a large portion of fixed-rate mortgages will expire this year, leading to increases in interest rates for these borrowers.

Inflation is still high in Australia

The RBA is set to increase interest rates again next month, a majority of fixed-rate borrowers are expected to experience a significant increase in their minimum repayments. This year will be a test of market conditions according to Eliza Owen, head of Australian Research at CoreLogic.

Despite this, the sudden and sharp fall in prices last year masked the significant increase in home values over the past decade, especially since the start of the pandemic. Among the country’s capital cities, home values are still higher by an average of 11.7% since March 2020, and in regional markets, they are higher by an average of 32.2%. Melbourne is the only capital city where last year’s price declines have nearly wiped out all the gains since Covid-19.