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Interest rate hikes trigger Australian housing market’s biggest decline in 40 years

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Wed 02
Interest rate hikes trigger Australian housing market’s biggest decline in 40 years

The Reserve Bank’s aggressive rate-hiking cycle has triggered the housing market’s biggest decline in more than four decades.

The 8.4% drop between May 2022 and January 2023 is the deepest peak-to-trough fall on CoreLogic’s records, which date back to 1980.

It surpasses the previous record-breaking slide between 2017 and 2019, as well as the downturn prompted by the 2007-2008 Global Financial Crisis.

Sydney home values led this latest nosedive, falling 13% from their highest point.

Brisbane prices plummeted 10% while Melbourne dwelling values tanked 8.6% from peak to trough.

The Reserve Bank’s combined 300 basis points in interest rate increases have shrunk the amount buyers can borrow and generally cooled their confidence.

High household indebtedness may have increased the housing market’s sensitivity to interest rates, CoreLogic head of research Eliza Owen said.

“Higher inflationary pressures, combined with a post-lockdown increase in spending, has also eroded household savings, which could be utilised for a home loan deposit,” she added.

The market may also be enduring a “hangover” from higher sales and activity in 2021 that’s left a vacuum in demand.

The market is unlikely to have bottomed out, with further cash rate increases from 3.1% likely to continue driving prices lower in 2023.

Markets are pricing-in a cash rate peak of about 4% while forecasts by economists average to a more subdued 3.6%.

“Ongoing increases in interest rates will further erode the borrowing capacity, and likely prolong the country’s housing downturn until interest rates stabilise,” Owen said.

Weakening property prices and high building costs continue to weigh on new building projects, with housing approvals falling 9% in November.

Building approvals, the key indicator of future activity in the construction industry, have sunk by 21.7% since August.

Australian Bureau of Statistics data released on Monday mark the third consecutive month of lower council approvals.

The November decline was led by the more-volatile private attached dwelling segment, which fell 22.7%. Approvals for private sector houses dipped 2.5%.

Total dwelling approvals fell in NSW, Western Australia, South Australia and Queensland but lifted in Tasmania and South Australia.

The value of non-residential building approvals remained robust, however, lifting 2% in November.

Master Builders Australia CEO Denita Wawn said the November building approvals numbers highlighted the economic pressure faced by the industry.

“Higher-density home building approvals, which are particularly sensitive to interest rate movements, had shown momentum during 2021 but this is now on the way down,” she said.

Wawn said rising interest rates as well as labour and material shortages were weighing on new home building.

CommSec economist Craig James said building approvals are often volatile but had been trending downwards since the HomeBuilder program wrapped up.

He expected to see building approvals edge lower as financial conditions worsened and high borrowing costs subdued demand for housing.

“However, the return of overseas migration to a very high level and subsequent stronger population growth is likely to provide a headwind to approvals, the broader housing market and place further strain on the rental market,” James said.

Source: https://www.theguardian.com/australia-news/2023/jan/09/interest-rate-hikes-trigger-australian-housing-markets-biggest-decline-in-40-years