When will house prices find their floor?

When interest rates level out, the current housing downturn is likely to follow suit, the research head at CoreLogic says.

According to the property and data analytics provider, if interest rates start to trend lower in late 2023 or in 2024, this could be the catalyst for a return to growth.

CoreLogic August data shows the national home value index fell 1.6% from July to August: the biggest monthly decline since 1983. It marked the fourth consecutive monthly fall, the median national dwelling value now sitting at $738,321. Up 4.7% over the year ending in August, the median value has risen by around $33,182.

At a Bluestone Home Loans webinar hosted by Bluestone Home Loans CEO Campbell Smyth (pictured above left) on Wednesday, CoreLogic research director Tim Lawless (pictured above right) spoke about current and future housing values, and the factors affecting growth.

Summing up the market in different regions of Australia as showing “absolute diversity”, Lawless acknowledged that the market had entered a downturn.

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Before the official cash rate came off a record 10-basis point low in May, the rate of house price growth was already slowing, he said.  After the first rate hike was announced, CoreLogic data showed an acceleration in the rate of decline of property values in Sydney and Melbourne.

Successive rate hikes have prompted a fairly sharp downturn in Brisbane property values, and more recently, values in Adelaide and Perth have also started to nudge lower, he said.

“Every other capital city across the smaller capitals is also in some level of a downturn now,” Lawless said.

But although housing values in Sydney and Melbourne are still falling, CoreLogic data shows the rate of decline is no longer accelerated, he said.

“What we’re seeing in the marketplace is this initial shock factor of interest rates rising from their emergency lows, which was the catalyst for quite a sharp reduction in the rate of growth, moving the market into negatives,” Lawless said.

“Now we’re starting to see the market much more priced in future interest rate hikes and no longer seeing acceleration in the downturn.”

Five of the eight capital cities in Australia showed a fall in dwelling values over the last three months, showing the downturn had become broad based, Lawless said.  The exception was Darwin, although Lawless acknowledged that its share of demand and property sales was extremely low.

The CoreLogic rolling quarterly change in property values (August) showed Sydney at -5.9%, Melbourne at -3.8%, Brisbane at -2.5%, Adelaide at 1.6%, Darwin at 2.3%, Perth at 0.4%, ACT at -2.6% and Hobart at -3.3%.

The median property value in Sydney is currently $1.066 million, the city leading the downswing, with property values falling 2.3% over August. Lawless said Sydney’s housing market peaked earlier than other markets, with housing values down 7.4% since peaking in January 2022.

“It won’t be long before Adelaide and Perth move into a negative quarter-on-quarter change, each of the other major capitals is already down on a quarterly change,” Lawless said.

However, it was encouraging to see the rate of decline on the rolling monthly numbers start to level out, he said.

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Lawless said a stabilisation in interest rates is likely to be the cue for housing prices to stabilise.

NAB is currently forecasting a peak cash rate of 3.1%, while ANZ expects the cash rate to peak at 3.35% in late 2022 or early 2023. The RBA is weighing up a 50 or 25-basis point rise in October, taking the cash rate, currently 2.35%, to a maximum of 2.85% next month.

“As interest rates level out, we are expecting housing prices will also stabilise. Other factors that could contribute to housing prices finding a floor would be any material policy incentives, such as additional first home buyer stimulus which has previously seen a rapid response in demand from this sector of the market,” Lawless said.

Lawless told Smyth he expected housing values to fall between 12% and 15% from the peak to the trough, on the proviso that there is currently a great deal of uncertainty on where housing values might land.

The trajectory of housing values is highly dependent on how high interest rates go and how fast they get there, he said. 

“There is a good chance we will see the cash rate peaking during the first half of 2023, however financial markets are still pricing in a peak cash rate by September of next year,” Lawless said.

If interest rates start to trend lower either late next year or in 2024, this could be the catalyst for a “subtle level of growth” to return to housing markets, he said. 

Speaking about the effect of official cash rate rises on borrowers, Lawless acknowledged that a high portion of fixed rate loans due to roll off next year were preceded by a ‘2’ and would be refinancing to a figure well into the 5% range.

Brokers and lenders with customers whose loans are due to expire over the next six months should already be preparing them for what to expect, so they can start planning and budgeting, he said.

Lawless said there were a few mitigants for the interest rate shock, namely that borrowers were typically assessed at a mortgage rate of at least 2.5 percentage points (more recently three percentage points) higher than the market rate. The tight labour market, with income growth expected to pick up, would also be beneficial to borrowers, he said.

“I think it will be another one of those cliffs that a lot of people are worried about, that generally will be navigated quite well,” Lawless said.

According to the current Fitch Ratings mortgage market index Australia (The Dinkum RMBS Index 2Q22), over the second quarter of 2022, 30-day mortgage arrears fell to seven basis points, to 0.82%.  Arrears were at their lowest level since at least 2002, the ratings company said.

Lawless said currently, 90-day arrears were around 0.6 nationally.

“There will be some borrowers who get caught out and can’t service their refinance loan on a higher mortgage rate…we should expect that arrears will rise as we start to see this refinancing coming through, but I don’t think it’s going to be catastrophic,” Lawless said.

In response to whether he expected lending volumes to fall in line with falls in dwelling values and interest rate rises, Lawless said there was a correlation, but whether they turn at the same time depends on a range of economic factors, and any additional stimulus.

“Broadly, I think we’d have to expect once interest rates stabilise, there probably will start to be at least a stabilisation in system credit growth and housing market activity, if not even starting to see some improvement off what’s probably going to be relatively a low base,” Lawless said.

Lawless said housing downturns in the past showed transactional activity fell by about 25% (from the peak through to the trough). So far, activity has fallen by around 15%, he said.

“I think once we start to see rates stabilising and the dust settling, we will start to see transactional activity (credit activity) start to stabilise, if not improve,” Lawless said.