What’s going on with property prices?

What’s going on with property prices?

Australia’s property market has been in the news after a slowdown in auction clearance rates and falling home prices across major capital cities. Experts are pointing to a number of reasons, but a big one is a shift in investor money away from property… So in this Squiz Shortcut, we’ll take a look at:

• What’s going on

• Where the government sits

• And what the experts are saying…

🙋🏻‍♀️ This newsletter was written by Larissa Huntington and Sophie Felice

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Squiz the Shortcut

Why are people so obsessed with property prices?
It’s almost a national sport for Aussies to follow what the property market’s doing. Even if you’re not already a homeowner, you might be saving for a deposit or you’ve got your eye on interest rates because they directly affect rents. And over the past decade or so, we’ve become used to an upward trend - so when the market starts changing direction, it gets a lot of attention…

What’s been happening?
Over the past few weeks, we’ve seen some low auction clearance results coupled with falling home prices across our biggest cities. And when we say auction clearance rates, we mean the percentage of properties that sell at auction on a given week. Generally, the higher the rate, the more demand there is, so they’re a good indication of how healthy the property market is. 

How do they compare to last year?
On the whole, they’re a lot lower. For some context, a clearance rate above 60% is generally considered to be a balanced market - there’s fair growth and it’s a stable environment for both buyers and sellers. But the national clearance rate is currently 49.8% - so, well below that 60% mark…

Talk me through it…
Taking a quick sprint around the cities last weekend: In Sydney, 51.6% of stock cleared, in Melbourne, 54.5% went, but in Brisbane, only 23.8% of homes were sold at auction. When you compare that to the same weekend last year, it’s vastly different. Last year, Brisbane recorded a 69.6% clearance rate, while most other capitals were between 63% and 70%... 

What’s happening with prices?
They’ve been falling too… Sydney and Melbourne have both seen drops of around 1% over the past month, and analysts say Melbourne’s values are now below where they were a year ago. Canberra has slipped backwards too, and Adelaide has also lost momentum. Only Darwin and Perth are outliers in the stats…

What’s happening in those cities?
Darwin’s had an increase of 19% in the past year and Perth is at 24% - but overall nationally, the market’s been as slow as a Bunnings carpark queue on a long weekend…

What’s behind it?
As you can imagine, lots of people are studying this closely… Economists say it’s down to a perfect storm of factors all coming at the same time, but a big one is a shift in investor behaviour due to the Albanese Government’s changes to negative gearing and capital gains tax as outlined in the Budget… 

Remind me about those…
From 1 July next year, investors buying existing homes (or who bought one after Budget night) will lose access to negative gearing as they knew it, and the long-standing 50% discount on capital gains tax will be replaced by one linked to indexation with a minimum tax rate of 30%. So even though they haven’t taken effect yet, analysts have picked up a definite vibe change in the market which they say is slowing sales right down.

What about people who aren’t investors?
A lot of them seem to be hitting the brakes too. And analysts reckon a big factor there is rising interest rates… The Reserve Bank has increased rates 3 times this year. It left them on hold at 4.35% at its last meeting in June, but underlying inflation is still higher than the bank’s target range of between 2-3%, so it hasn’t ruled out more rate increases to bring it under control. 

Just explain that a bit more…
Some economists say the forecast for higher interest rates is spooking people - because when rates go up, so do mortgage repayments, and that has a whole ripple effect on the economy. People looking to buy homes are also conscious of cost-of-living pressures and ongoing international tensions fuelling inflation, which are adding to an overall sense of caution when it comes to making big purchases like a house or an apartment. 

How far could prices fall?
The banks aren’t predicting a quick turnaround… NAB expects prices in capital cities to fall around 2%, while investment bank Morgan Stanley is predicting a fall of between 5 and 10%, which would represent one of Australia’s largest housing price corrections in the past 4 decades. 

That sounds a bit dramatic…
It does, but a correction isn’t the same thing as a crash. As a country, we’ve had decades of continuous growth in our housing market. A crash suggests that prices are falling off a cliff and the market’s in real trouble. But economists say that’s not what’s happening…

So, what’s a correction?
It’s more like the market taking a step back after it’s made several giant leaps forward. One article in the ABC put the correction at 10% which would put prices back at 2024 levels. Based on the Morgan Stanley prediction, it’d still mean a property market that’s significantly more expensive than it was 5 or 10 years ago - it’s one of the most expensive in the world. 

How is the shift going down?
For many Australians, a correction is exactly what they want. A lot of younger people have seen house prices grow to such high levels - and so much faster than wages - that the idea of buying their first home has gotten further and further out of reach. The typical house in Australia now costs about 9 times the average income - way more than it did decades ago. So for those people, a cooling market is good news. But at the same time, it’s a substantial mental shift for a lot of us…  

How so?
For years, continuous growth has shaped the way many Aussies think about property. It hasn’t just been somewhere to live, it’s been one of the main ways we’ve built wealth. People have stretched themselves to buy their first home on the basis that it’d hopefully be worth more in a few years. They’ve upgraded (or flipped) them, bought investment properties, negatively geared them, and planned for retirement on the assumption that property prices would keep rising. So in changing policy around it, the government is taking a political gamble. 

What’s the government’s position?
PM Anthony Albanese has been very clear that he believes the Australian housing system is “broken” and needs fixing. So to make it “fairer”, the government is discouraging investors from buying existing homes. They want to boost productivity by channelling money - particularly from investors - into new builds instead. They say that’ll increase housing supply while opening the market up to younger first home buyers so they can get a look in.

And the critics?
The government’s come in for quite a bit of criticism over the policy. A lot of it has to do with people feeling financially confident, and how that plays into the economy. To explain, some economists argue that when people’s home values are going up, they’re more likely to have the confidence to spend money in other areas - so for instance, they might be more inclined to renovate or buy a new car or go on a holiday because they feel financially secure. But when property values are falling, the data shows they’re more likely to tighten their belts.

What impact does that have?
It can affect the economy more broadly in that if people stop spending across the board, it doesn’t grow as much as the government would like. And then there’s the matter of housing supply - some analysts argue that it mightn’t play out the way the government is expecting…

Why not?
As we mentioned, Team Albanese says their new tax policies are helping to boost the number of new homes by encouraging buyers into new builds. But analysts have pointed to past data showing developers typically don’t rush into new projects in a falling market. And people thinking of buying those new homes are likely to be conscious that there won’t be the resale demand there because, when they go to sell it, it’ll be classified as an existing home, and therefore not as attractive to investors - which could explain why they’re baulking. 

Anything else?
This is one of the reasons that the government has come under fire from the Coalition who say the tax changes are an “assault on aspiration”. The other big reason some people are unhappy is that the government promised not to meddle with negative gearing and CGT going into the last election. Cue a lot of criticism about broken promises... Still, plenty of other experts have acknowledged that the rate of growth in Australia’s property market has become unsustainable and that a controlled correction could leave us with a healthier housing market in the long run. 

What if I’m a renter?
AMP economist Shane Oliver says he expects there to be what he called “upward pressure” on rents as a result of the government’s changes (meaning a rise…) and think tank the Grattan Institute says there should be a small increase in capital cities, whereas some other independent modelling is actually flagging an overall decrease in rents. The hard evidence from property website Domain shows that Aussies are paying record-high rents across all capital cities, lifting annual growth to its strongest pace in almost 2 years…

So what’s next?
This is one of those stories where we’ll be watching the data month by month for some time until we see how it all shakes out. In other words, your barbecue/dinner party/pub conversation is sorted for quite a while…

Onto our Recommendations

Perusing: This article published in The Conversation looks at the slowing market and what it might mean for the economy more broadly.

Listening: If any Squizers missed it, Claire and Kate dove into it on News Club last weekend so we’ll point you to that episode for some more insights (and a glimpse into Claire’s dinner party entertainment…).

Chicken with some sides

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