Are the Rising Rates Slowing Down the Property Growth Rate?

The property growth rate in Australia is slowing down as the official cash rate is on the rise. While some markets are seeing a sharper downturn, others are experiencing re-acceleration and resurgence.

Most capital cities are seeing a slowdown in growth rates

Property growth rates across most capital cities have slowed but it’s not the same for smaller capital cities and regional property markets. 

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After a very strong, demand-driven market in 2021, Sydney's house prices fell for the third month in a row in April, falling 0.5 per cent, while Melbourne's house prices fell 0.1 per cent. In both locations, the higher end of the market is leading the slide, which corresponds to historical statistics showing that the top 25% of the market experiences more significant highs during an upswing and vice versa.

In their research, the Reserve Bank of Australia (RBA) substantiated that the areas with higher values and higher investment concentration are more likely to be affected by the cash rate changes and credit availability. This is a sign of a wider market slump in the future.

Contradictory to the slump in major capital cities, the smaller cities like Brisbane and Adelaide have proven to be more resilient. The major reasons for that are acceptance of remote work culture,  interstate migration, and affordable dwelling prices. People want to live in a bigger yet affordable space and spend more family time after the pandemic.  

While the smaller cities are seeing an elevated growth rate, these rates are gradually slowing down from around 8 per cent at the end of 2021 to about 5-6 per cent right now.

Diverse rental conditions across the capital cities

The rental market was significantly affected during the pandemic across numerous capital cities because of travel restrictions and a lack of international migration. However, when vacancy rates fell to a multi-year low of 1.5 per cent in 2021, rental growth began to pick up again at the start of 2022 signalling a further rebound, particularly for units.

The unit segment was most impacted at the onset of COVID-19 but lately, Sydney and Melbourne are leading growth in the unit rentals. 

Quarterly rent value rise in Melbourne units has been roughly 3.5 per cent, more than double that of house rents during the same period. Due to increased demand from international migrants who generally come to Sydney and Melbourne first, this trend is anticipated to continue.

With rental demand increasing, the gross yields are showing signs of rising up to 3 per cent from being a record low of 1 to 1.5 per cent. Sydney is leading the trend in terms of growth as it is up by 9 basis points at 2.5% while Melbourne is up at 2.8 per cent, up by seven basis points.

The extraordinary reversal of trends is encouraging some investors back to invest back in the market.

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The approvals and lag in the new construction work  

Development permits, especially for detached houses have soared because of the federal government's Home Builder Grant. Approvals for new apartments and houses have climbed at the fastest monthly rate on record with total dwelling approvals up 43 per cent in February 2022 from January. 

Extraordinary new houses are built in states like Western Australia where at the end of 2021 there were almost 20,000 homes under construction which is double the decade average. 

The problem is the lag between approvals and construction due to the significant increase in construction costs. The construction costs rose by 9 per cent over the 12 months to March 2022 because of an upswing in approvals and supply chain issues. 

There’s a re-acceleration in the investor activity even though the upswing in construction is led by the owner and occupier. The investor lending value grew by 11 per cent over the month of March which is considered to be the fastest growth rate in mortgage lending for any of the buyer segments. 

Once the demand increases and the gross rental yields grow, the market will tilt towards apartment development. Given the upside of the potential yield, this will increase the number of lots under control for strata firms, as well as provide additional investment opportunities for professionals looking to diversify their property portfolios.

Potential decline scenarios for the housing market

According to data, upward cash rate fluctuations have exerted downward pressure on price growth during the last 20 years. If the cash rate is raised 200 basis points, the RBA predicts a 15% drop in national home prices.

What does it signify for Australia’s housing market?

Optimistically, a 10 per cent drop would return us to mid-2021 housing price levels while a 20 per cent drop would put us at a level similar to January 2021.

This means that even a 20 per cent drop in housing prices will only impact the recent buyers by putting them into a negative equity position. It becomes a problem only if there are concerns around serviceability.

If the dwelling prices fall but homeowners can still pay their mortgages, they are less likely to try to sell their homes during a slump. As a result, we should expect fewer listings and sales.

Predicting for 2023, some borrowers may be affected but a healthy labour market, growing salaries, and accumulated savings from the pandemic are all likely to strengthen serviceability.

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