Is the housing market at a turning point? This is what the data says

After a peak-to-trough drop of just over 4%, house prices at the national level are now rising again, with Sydney leading the rebound.

The housing market started the year on a strong footing, with home prices rising three times in March after nine consecutive months of declines.

Market conditions are strong, auction volumes are down, but clearance rates are among the highest of the year.

It is also still rising compared to the second half of the year, when a sharp rise in interest rates created a mismatch between buyer and seller expectations.

Rising mortgage rates, inflation and economic uncertainty have dampened homebuyer demand, resulting in sales volumes falling from the highs seen in 2021 and early 2022.

Domestic sales volume in the first 12 weeks of 2023 was down 24% compared to the same period in 2022.

However, they are close to the levels seen in the same period in 2020 and above the volume recorded in the first 12 weeks of 2019.

What drives the rebound?

While interest rates have been the main driver of home price declines so far, there are other factors in the market.

The supply of real estate for sale, immigration rates, new home construction, a tight rental market, and interstate and interregional migration all affect home price trends and their distribution across the country.

At present, a soft flow of new listings and limited market inventories, combined with a tight rental market and a strong immigration recovery, are offsetting downward pressure from rising interest rates.

There are fewer properties on the market than at the same time last year, creating a more competitive buying environment and increasing home values.

The level of buyer demand helps keep prices resilient to the declines implied by changes in calculated borrowing capacity.

The markets that drove the recession are now leading the early recovery

according to the latest PropTrack Home Price IndexSydney has led the recovery in house prices so far, posting the biggest gains of any capital city in the past quarter.

Sydney house prices rose 1.01% in the March quarter, the fastest pace since the December 2021 quarter.

Sydney also led the recession, seeing the biggest correction, with house prices falling 7.19% from its peak recorded in December 2022 to its lowest point.

Prices in Sydney are still 6.25% below peak, but the decline only slightly reversed the pandemic boom, with house prices up 22.8% from pre-pandemic levels.

House prices have also fallen from their peaks in most markets, although capital and regional markets across Australia have risen significantly compared to pre-pandemic levels.

Drilling down into smaller geographic areas, the regions that led the recession appear to be leading the new recovery.

Digging deeper into the data by percentile, the bottom end of the market held up better during the recession, while the top end is driving the recovery.

Prices have recovered the most in the more expensive areas of Sydney and Melbourne after falling sharply during the recession.

More expensive home stocks have generally registered sharp declines, and opportunistic buyers may be getting involved again.

We’ve seen similar trends in previous cycles, with market caps leading both recessions and subsequent recoveries.

what’s ahead?

Right now, the interest rate cycle is at or very close to peaking.

Significant declines in borrowing capacity and lower affordability mean more price declines than we have seen so far, but the downward pressure on prices from the already significant tightening will be offset by strong demand drivers. It has been.

A strong rebound in immigration and a tight rental market, combined with limited inventory in the market, are supporting home prices.

The RBA is now pausing its tightening cycle, and as some of the uncertainty experienced by homebuyers diminishes, house prices may stabilize further and the bottoming process may continue.

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With interest rate rises seemingly coming to an end, both buyers and sellers can better adjust to the higher interest rate environment and move forward with their property plans. Things will change if inflationary pressures become more persistent than expected.

Inventory levels will also impact home prices in the coming months. If the listing environment remains constrained and there are fewer properties on the market, prices may continue to hit rock bottom.

However, headwinds remain and the full impact of recent rate hikes has not yet been felt.

Fixed Rate Mortgage Cliff?

This is why the so-called “fixed-rate mortgage cliff” will be an important test of what lies ahead in the coming months and whether falling prices will find a second wind.

It will take time for rising interest rates to fully impact household cash flows.

And in this tightening cycle, the far too many borrowers who took out record-low mortgage rates during the Covid-19 pandemic have yet to fully feel the impact of rising interest rates.

Given that more than a quarter of mortgages are CBA loans, a closer look at CBA loan balances is something of a market indicator. One-half of outstanding fixed-rate mortgages will expire at some point this year.

Many of these borrowers are facing a significant increase in their mortgage payments as fixed rate terms expire in the coming months.

The RBA’s Securitization Dataset shows that about 35% of outstanding mortgage debt is pegged. About 70% of its debt will be shifted to variable loans this year. These households are facing exponential increases in service costs as they move to significantly higher rates.

This increase is to some extent offset by the significant savings made during the cheaper fixed period.and For those who can refinance In competition with another lender, the current level of competition (credit conditions are not very good, seeing many lenders offering discounts) will also give you some reprieve.

The market looks like it’s bottomed out. Photo: NCA

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In addition to liquidity buffers, the massive surge in house prices due to the pandemic means many households have substantial equity buffers in their homes.

Tight labor market conditions also provide a safety net for many households.

Banks also work with their customers to minimize this hangover, or cliff, as some put it.

But there is no doubt that this will be a difficult time. With the cost of living pressures resting elsewhere, significant budget adjustments will be required.

In most cases, homeowners are more likely to prioritize paying off their mortgages, reducing household spending and preventing mortgage defaults and a significant number of bad sales.

As such, we expect a sharp slowdown in consumer spending in the coming months as the impact of higher interest rates already on the table fully catches up.

All in all, the bottoming out process for the housing market seems to have begun.