Sydney, Melbourne Brace for Falls as Rate Rise Looms

Growth in Sydney and Melbourne’s housing markets are continuing to stall as higher than expected inflation numbers may force the hand of the Reserve Bank to hike cash rates, potentially as early as this week.

Residential property prices boomed last year, surging to three decade highs, on the back of record low mortgage rates and government incentives.

The annual growth trend in home values is now falling sharply, with the national reading dropping from a recent peak of 22 per cent growth over the course of 2021, to 16.7 per cent over the most recent 12-month period. 

National house prices climbed 0.7 per cent—the slowest pace in 18 months, and apartment prices rose by 0.2 per cent—the slowest pace for units in 15 months. 

Since bottoming out in the first months after the pandemic began, Sydney prices had risen by 27.7 per cent between September 2020 and January 2022, while Melbourne increased by 17.3 per cent over the same period.

Property values in Australia’s two biggest cities have now notched three consecutive months of lower prices over the start of the year, signalling the beginning of the broader downturn in these markets.

According to recent figures from Corelogic, house prices have slumped Sydney by -0.1 per cent in April to now be down by -0.3 per cent over the past quarter.

Across 2021, the city experienced an average increase of $1100 per day, or a total rise of $400,000. 

Similarly, in Melbourne, house values fell by -0.2 per cent to be -0.5 per cent down over the quarter. Unlike Sydney, values are down over three of the past five months in Melbourne.

By contrast, the smaller capitals have continued to post monthly gains, led by Adelaide, with 1.9 per cent rise, followed by Brisbane with 1.7 per cent. 

Canberra and Perth rose 1.3 and 1.1 per cent, respectively, while Darwin rose by 0.9 per cent. Nationally, values lifted by 0.6 per cent.

Corelogic research director Tim Lawless said price falls in Sydney and Melbourne were likely to accelerate in the months ahead after hitting their peaks while trend rate of growth was also easing in Brisbane and Adelaide, despite both cities strengthening in recent months.

“Based on rolling quarterly change, Brisbane dwellings moved through a peak rate of growth in December last year at 8.5 per cent, slowing to 5.7 per cent over the most recent three month period,” Lawless said.

“Similarly, Adelaide moved through a peak in the trend rate of growth in January at 7.4 per cent, reducing to 5.4 per cent in April.”

Australia now faces the prospect of a pre-election rate rise by the RBA after underlying inflation soared to its highest rate in 13 years.

While the headline quarterly rate of 2.1 per cent has easily exceeded the consensus expectation of 1.7 per cent, the trimmed mean measure was also sharply higher at 1.4 per cent–the highest since the ABS began the series in 2002.

“With the RBA cash rate set to rise, potentially as early as tomorrow, we are likely to see a further loss of momentum in housing conditions over the remainder of the year and into 2023,” Lawless said.

“Stretched housing affordability, higher fixed term mortgage rates, a rise in listing numbers across some cities and lower consumer sentiment have been weighing on housing conditions over the past year.

“As the cash rate rises, variable mortgage rates will also trend higher, reducing borrowing capacity and impacting borrower serviceability assessments.”

AMP Capital chief economist Shane Oliver said he expected the RBA to increase the cash rate to 1.5 per cent by year end which would in turn push variable mortgage rates up by nearly 1.5 per cent by year’s end.

“The surge in fixed rates over the last year has been taking the edge off new home buyer demand well ahead of any move by the RBA and this has further to play out,” Oliver said. 

“High inflation which is making it even harder to save for a deposit, higher supply in Sydney and Melbourne as a result of vendors seeking to take advantage of high prices and a rotation in consumer spending back towards services as reopening continues, may reduce housing demand.”

Oliver said average home price growth this year was now expected to be flat before declining by 10 per cent decline in average prices next year.

“The property slowdown is occurring earlier relative to the timing of RBA rate hikes this cycle because of the bigger role ultra-low fixed rate mortgage lending played this time around in driving the boom,” Oliver said.

“Top to bottom, the fall in prices into 2024 is still likely to be around 10 to 15 per cent, but, seen in the context of the huge 25 per cent plus surge in prices since their 2020 low this will just take average prices back to the levels of around April last year, so a big rise in negative equity is unlikely.”

The RBA board meets on 3 May.