Silver Lining

Are there Any Silver Linings on the Horizon for the Australian Property Market?

This month, interest rates were raised in Australia for the first time in more than 11 years. This could cause housing prices to drop quickly and make Australian homebuyers much more cautious.

Economists have predicted that home prices will go down, with Sydney and Melbourne possibly getting the biggest shock with a 15% drop by the end of 2023 or the beginning of 2024.

The Reserve Bank of Australia (RBA), which raised the official interest rate to 0.35%, also forecasted a 15% reduction in housing prices. A 15% drop would wipe out the majority of the 23.7% growth in property values in 2021.

The chief economist at AMP predicts that property prices will fall by as much as 15% in the next 18 months. Meanwhile, property data firm SQM Research has predicted a 7% decrease in Sydney and an 8% drop in Melbourne as early as this year, albeit there is a fair likelihood of a quick comeback if wage increases accelerate. But buyers will be “scared off” by Australia’s first interest rate increase in 11 years, and the number of people who want to buy a home is likely to drop by a lot.

Other experts are more conservative, with the head economist at My Housing Market projecting a two-percentage-point drop in the two biggest cities this year. Melbourne and Sydney have stabilised those higher prices, and there is no more room for growth at the remarkable rates seen last year. The issue of buyer interest is also being felt strongly in the building industry.

Capio Property Group, a real estate company based in Sydney, said that the number of buyer inquiries had dropped by a shocking 50%.

Inquiries are always the most accurate predictor of future price movements. If there is a decrease in inquiries, prices will also decrease.

Is less competition better for buyers?

People were scared about buying a home, according to Sydney-based buyer’s brokers, which produces less competition, allowing them to get properties for 10 to 15% less than six months ago. Buyers exit the market as confidence fades. Rising interest rates are expected to cause a domino effect, but it may take two to four months to reach the market.

As interest rates climb, purchasers may be unable to borrow as much money. As a buyer’s budget decreases, so do the demand for homes in that price range, as the customer can now only afford a less expensive home. In addition, prospective buyers who have not yet located a home and whose pre-approval has expired may need to return to their bank. The bank will reevaluate the capacity of some buyers to make loan payments. With higher interest rates, the bank may no longer be ready to lend the same amount; it may be less. Because of this, buyers will be priced out of the market if their ability to pay goes down.

Interest rate hikes are going to severely reduce people’s budgets. 

All this means buyers will be shopping with reduced budgets.

This then has a knock-on effect on house prices, as buyers can no longer spend the same amount to buy a house. House prices may therefore drop as a result.

Over the next two months, pre-approved buyers would be advised to continue looking with the money they now have, as their budget may be reduced tomorrow. For sellers, their houses should be placed on the market immediately, while there are still purchasers with today’s budget and not a decreased budget in three months.

What the real estate agents are seeing

There has been a shift, with many consumers becoming more frugal. It has also frightened sellers, with 9% fewer listings for the agents compared to last year. Having fewer houses on the market could be good news for property prices.

It does indicate minimal levels of distress and will avoid a significant decline in home prices. However, this will make it more difficult for purchasers to take advantage of cheaper prices.

When markets approach a new cycle, sellers are often more reticent about placing fresh listings on the market. This scarcity of new inventory makes it difficult for buyers to find a quality house. So, in a slow market, very attractive assets are in high demand and often do things that don’t make sense.

With less new inventory entering the market, the decline in home values will be mitigated. In contrast, the growth of home prices has slowed down a lot in the past few months, in part because fixed mortgage rates have gone up.

However, according to financial experts, the changing conditions could be excellent news for first-time homeowners. The anticipation of much higher borrowing rates in the coming couple of years will be solidified by rate hikes, which should have a negative impact on home prices and depress the housing market. This will alleviate the desperation of first-time homebuyers attempting to enter the market.

The impact of major parties’ housing schemes

The Federal Government recently stated that the price ceilings and quantity of available guarantees for the first-time homebuyer guarantee programme would be increased. First-time buyers can buy a home with as little as a 5% down payment, and the price cap on homes that qualify has been raised to $900,000 in Sydney and $800,000 in Melbourne.

But 70% of the Finders’ RBA cash rate panellists think that the higher caps would cause home prices to go up.

Regarding the influence of the government programme on home values, experts are divided. Two-thirds also advised against buying a home with a 5% down payment. A 5% deposit means you are paying interest on 95%. In addition, any decline in the housing market makes it feasible to go into negative equity, as many European homebuyers did during the Great Recession.

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