Australia’s Surging Property Market May Be Set to Cool as Affordability Pressures Mount
Table of Contents
Introduction
Australia’s property market, which has experienced a surge in prices in recent months, may be on the verge of cooling down. Analysts believe that rising borrowing costs, increasing affordability pressures, and a greater supply of housing stock entering the market will contribute to this slowdown. While property prices are still expected to rise, the pace of increase is projected to slow significantly. This article explores the factors contributing to the cooling of the Australian property market and the potential implications for homebuyers.
Rising Affordability Pressures
National home prices in Australia reached record levels at the end of October. However, analysis by Commonwealth Bank of Australia (CBA) shows that mortgage repayments as a share of income are currently the least affordable on record in all cities except for Brisbane and Perth. This declining affordability, combined with a reduced ability to finance larger purchases, is expected to dampen significant price rises in 2024.
Cooling Market Momentum
Tim Lawless, CoreLogic’s executive research director, notes that the monthly gain in home values peaked in May at 1.5%. The year-to-date advance has been 7.2%, and while the full-year increase may approach 10%, the market appears to be losing momentum. The pace of increases has been slowing even before the recent Reserve Bank interest rate rise. Lawless predicts that property prices will continue to rise, but at a much slower rate.
Soaring Interest Rates and Strong Market
Many commentators expected that soaring interest rates would lead to a fall in real estate prices in 2023. However, the market remained surprisingly strong due to a surge in population and a limited supply of new housing. The combination of falling affordability in most parts of Australia and a reduced ability to finance larger purchases is expected to contribute to a slowdown in price increases in 2024.
Affordability Constraints in Sydney
Sydney is the least affordable major city in Australia, with median dwelling prices at $1.090 million, equivalent to 5.1 times the typical dual-income household earnings of $215,000 per year. Melbourne, the second-least-affordable city, has a median dwelling price that is 3.8 times the average earnings. The national average is 3.6 times. CBA economist Harry Ottley suggests that Sydney may be approaching affordability constraints in terms of dwelling price growth.
Impact on Borrowing Capacity
The rising cost of mortgage repayments compared to incomes has significantly impacted borrowers’ capacity to buy property. In the year and a half since the Reserve Bank of Australia (RBA) began increasing its key interest rate, incomes have risen by an average of about 4.5%. In contrast, mortgage repayments have increased by almost 52% with the latest rate hike. As a result, the ability to borrow for a dwelling has decreased by about 30% since the start of the rate-hiking cycle.
Reduced Borrowing Capacity
Assuming the borrower secures the lowest advertised variable loan rate and has a 20% deposit, the recent rate rise will reduce borrowing capacity by approximately $10,500 for a single person. For a family of four with one person working full-time and the other on half pay, the average borrowing capacity has shrunk by over $275,000. These reductions in maximum borrowing capacity are expected to have a cooling effect on the property market.
Other Indicators of a Cooling Market
CoreLogic’s Lawless points to other signs that the Australian property market is coming off the boil. Auction clearance rates have dropped to around 62% across capital cities, down from the low-70% range in mid-2023. The number of properties being put up for sale has increased, and homes are taking longer to sell. In the current week, there are 30% more homes up for auction in capital cities compared to the same time last year.
Stability in the Housing Market
Despite the cooling of the property market, there is little indication of a rise in forced home sales. The proportion of mortgage loans in arrears for more than 90 days remains low at about 0.6% of the total. This low level is partly due to the tightness of the labor market, which provides a safety net for the housing market. The Reserve Bank also agrees that housing price growth may be losing momentum and expects a slowdown in the coming months.
Conclusion
The Australian property market, which has experienced significant price increases, may be set to cool down. Rising affordability pressures, increased borrowing costs, and a greater supply of housing stock entering the market are expected to contribute to this slowdown. While property prices are still expected to rise, the pace of increase is projected to slow significantly. This cooling of the market may have implications for homebuyers, with reduced borrowing capacity and a potential decrease in property affordability.
