‘Sinking all the boats’: house price downturn hits double digits

Key points

  • Median house values have dropped more than 10 per cent in Sydney since the market peak, and have fallen more than 6 per cent in Melbourne and Brisbane.
  • The Reserve Banks expects property prices nationally to fall 11 per cent, but modelled they could fall 20 per cent if people become more pessimistic about the market outlook.
  • Economists at the big four banks expect peak-to-trough prices falls of about 15 to 20 per cent. 

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Sydney property values have tumbled more than 10 per cent since the market peaked, new figures show, while values in Melbourne and Brisbane have fallen more than 6 per cent and experts predict further falls ahead.

Sydney’s median home value has fallen 10.1 per cent since the city’s market peak in February, as rising interest rates curtail buyer borrowing power and demand.

Sydney property values have fallen 10.1 per cent since the market peak in February.Credit:Peter Rae

Values in Melbourne have declined 6.4 per cent since the city’s January peak, CoreLogic’s daily home value index shows, while values in Brisbane have dropped 6.1 per cent since June.

Adelaide and Perth have both declined less than 1 per cent since their August peaks.

CoreLogic research director Tim Lawless said Sydney, the most expensive capital city, was the most susceptible to rising interest rates. Price falls began in February and sharply accelerated as rates climbed, down 9.5 per cent since the first rate hike in May.

“This is all about a higher cost of debt and the erosion of borrowing capacity, and because house prices are so much higher [in Sydney], household balance sheets are more sensitive to the higher cost of debt,” he said.

Affordability constraints, low consumer sentiment, and high inflation were also affecting the market, he said.

While Sydney home values have had a sizeable drop, they would need to fall a further 11.4 per cent to get back to levels seen at the start of the pandemic, Lawless said. And with the pace of declines in the harbour city now slowing, values may be unlikely to fall that far, he added, although it would depend on how high rates climb. A 20 per cent decline would take Sydney property values back to levels seen in early 2021, Melbourne values back to mid-2019, and Brisbane values back to mid-2021.

“But it’s still a fairly rapid rate of decline and … I’m not expecting the market to level out until interest rates find a ceiling,” he said.

The figures come after documents released under Freedom of Information show the Reserve Bank expects prices to fall by 11 per cent nationally by late 2023.

The bank also modelled a downside housing price scenario, in which prices were tipped to fall 20 per cent by the end of 2024, assuming people became pessimistic about the outlook for house prices.

A decline of 20 per cent would be more in line with the predictions from the major banks, which have pencilled in peak-to-trough declines of 15 to almost 20 per cent.

What are the big banks forecasting?

  • NAB forecast a peak-to-trough decline of around 20 per cent in an update this month. Capital city prices are expected to fall 18.7 per cent on average this year and next. Prices are tipped to fall 22.3 per cent in Sydney, 23.2 per cent in Melbourne and 10.2 per cent in Brisbane.
  • CBA forecast a peak-to-trough decline of 15 per cent across the capital cities in an update last month. Prices are expected to fall 18 per cent Sydney, 17 per cent in Melbourne and Brisbane.
  • ANZ has predicted a peak-to-trough fall of 18 per cent across the capital cities. It forecast, back in August, for prices to fall 20 per cent in Sydney and 17 per cent in Melbourne in 2022 and 2023 and 12 per cent in Brisbane next year.
  • Westpac expects a peak-to trough fall of 16 per cent across the capital cities. Declines of 18 per cent in Sydney and Melbourne were noted in its August update, and prices in Brisbane were expected to fall 6 per cent next year.

Westpac senior economist Matthew Hassan said the Sydney correction is just past its half-way point and likely to continue next year.

While price declines had been rapid, Hassan said it was a demand-driven correction — as higher rates reduced buyer borrowing and spending power — rather than a distress-driven price correction, caused by a sudden shift in investor activity, oversupply or forced sales.

“The housing market is still hostage to the inflation fight and that inflation fight has further to run,” he said.

“But the day we get even the vaguest hint that the RBA is done with policy tightening you might see confidence come out of the woodwork pretty quickly.”

NAB chief economist Alan Oster has forecast a peak-to-trough decline of around 20 per cent, and falls of more than 20 per cent in Sydney, Melbourne and Brisbane.

However, he noted the projections were based on an interest rate peak of 3.1 per cent, and that prices could fall much further if the cash rate was to top 4 per cent, as markets are expecting.

Rising interest rates hit Sydney and Melbourne first, Oster said, but all markets would be affected.

“It’s basically like a tide, it either strands all boats or sinks all boats, and at the moment it’s sinking all the boats,” he said.

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