Australia’s housing boom may be losing steam, with market players warning that a mix of affordability pressures and higher interest rates are cooling the market — and potentially dragging down property prices.
"The broader momentum story is clear: all markets are slowing," said Gerard Burg, head of research at Cotality Australia. "Affordability constraints, rate rises. The heat is coming out of the market quite rapidly.
"As that demand has started to fade a little bit, the rate at which homes are selling has significantly decreased," he continued. "And so what that has meant is that as these new listings have come onto the market, they haven't been selling as quickly."
Housing supply remains a persistent concern across Australia. But attention is increasingly turning to property prices as listings begin to pile up.
According to Cotality’s May Housing Chart Pack, 39,319 properties were added to the market nationally in the four weeks to early May. That's 4.7% above the five-year average. The research firm added that while the overall number of homes for sale across Australia remains relatively low, stock levels are rising, especially in Sydney, Melbourne and Canberra.
In Sydney, for example, listings were sitting about 13% above the five-year average as of May. "It's a market that is looking much more well supplied at a time when demand is starting to decline. That really sort of explains that drift downwards that we've seen in terms of values for properties in Sydney more recently," Burg said.
"It's a similar story in Melbourne," he added. "The increase above the five-year average is not as extreme, but it's sitting about 4%."
That's good news for would-be homeowners looking to break into the market. But it is likely to unsettle sellers banking on soaring property values. It is fuelling speculation that a broader price downturn may be approaching.
“Sydney and Melbourne are already five months into the early phases of decline, while growth is slowing across the mid-sized capitals," said Cotality Research Director Tim Lawless. "Listings are picking up as demand softens, interest rates are rising while affordability and serviceability pressures are biting.”
With capital city home values up only 0.2% in April, compared with the month before, and continuing to fade, Lawless said the property market is losing momentum, and that home prices in the nation's major cities could actually start falling in the next few months.
But he added that housing slumps are usually brief. "Historically, housing downturns have been relatively short-lived, with all but three capital city downturns over the past 40 years lasting less than 12 months, although the length and magnitude have varied from city to city," Lawless said.
Australia’s combined capital cities have experienced 10 downturns lasting at least three months in the past four decades, according to the research firm.
The latest data comes as the property market faces mounting pressure from inflation, elevated interest rates, looming tax changes, tighter borrowing conditions, rising living costs and ongoing global uncertainty.
There is a growing view among market participants that housing may be entering the early stages of falling house prices.
"I think we'll probably see weakness across the board. Sydney and Melbourne prices have been falling since the turn of the year whilst they've been going up in other cities," Hobart-based economist Saul Eslake told Australian Broker. "Partly because of higher interest rates; partly because the changes to negative gearing and the capital gains tax (CGT) discount will dampen demand from investors, which it's meant to do. And partly because of just a general era of uncertainty around the conflict in the Middle East and the international situation."
The economist added that while the upcoming tax changes are likely to reduce investor demand for property, which would likely put downward pressure on property prices nationwide, there are other knock-off effects that could go in the opposite direction.
"Since investors have been grandfathered [tax rules], they may be less willing to sell their properties. Because if they sell their property and roll over, they won't get the same tax breaks," Eslake said. "So they may choose to hang onto their properties longer, which might mean fewer properties coming for sale, which reduces the supply relative to the demand, which might push prices in the other direction."
