Downturn looms as national market loses steam amid rising rates, global tensions

According to Cotality’s May Housing Chart Pack, conditions have been drastically scaling back, with capital city home values only 0.2 per cent higher in April.

Cotality research director, Tim Lawless, said that historically, factors in housing declines have included global shocks, rising interest rates, periods of credit tightening, changes in fiscal policy, and general affordability and sentiment.

He said Sydney and Melbourne were already five months into the early phases of decline, while mid-sized capitals have also been slowing.

“Listings are picking up as demand softens, interest rates are rising while affordability and serviceability pressures are biting,” Lawless said.

With capital city home values being just 0.2 per cent higher in April, Lawless said it was likely the combined capitals would move into decline over the coming months.

He said market momentum had further slowed due to the Reserve Bank of Australia’s (RBA) three rate hikes so far this year, with the possibility of further hikes later in the year.

“Importantly, the market was already slowing well before the hiking cycle commenced, highlighting the downside impact of waning confidence from late last year alongside rising inflation and worsening levels of housing affordability,” he said.

Lawless said that despite softer conditions, a period of substantial gains had left most home owners in a relatively strong equity position, with RBA data showing one per cent of households were in negative equity at the start of the year.

According to the Cotality’s Home Value Index, the combined capital city markets have recorded 10 downturns lasting at least three months over the past 40 years.

The largest decline in the market occurred between 2017 and 2019, with capital city values falling 8.2 per cent over 19 months, after a period of strong growth and the introduction of tighter lending conditions

Similarly, in 2022–23, values fell 8.1 per cent over nine months, while interest rates rose sharply following the pandemic.

The data also showed that tight supply conditions, which have prevailed in the market in recent years, have started to ease, with listing levels rising and buyer demand decreasing.

In the four weeks to early May, 39,319 properties were added to the market nationally, 4.7 per cent above the five-year average.

While the total stock of advertised properties remains low, the figure has been rising and holding at above average levels in cities such as Sydney, Melbourne, and Canberra.

Cotality said despite the weakening market, there was unlikely to be a substantial pick-up in distressed sales or mortgage arrears.

“At the end of last year, mortgage arrears were relatively low at around 1.45 per cent, below the 1.69 per cent peak recorded when interest rates were at similar levels in mid-2024,” it said.

Lawless said expectations of the labour market remaining tight and prudential standards, such as the three percentage-point mortgage serviceability, will likely keep arrears low despite high interest rates.

However, he said more recent buyers were likely to be exposed to the risk of negative equity as values fell, particularly participants of the 5 per cent deposit scheme.

“Recent buyers are arguably at more risk of seeing negative equity, given they have had less time to accrue value in their property or pay down the principal of their loan.”

“However, mortgage repayments are typically prioritised, with borrowers more likely to adjust spending elsewhere before missing a payment,” Lawless concluded.