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Australia housing market crash: Interest rate rises prompt property price declines

By Ryan Hogg

Edited by Jekaterina Drozdovica

14:54, 23 August 2022

Aerial view of rows of detached houses built during the 2010s in outer suburban Sydney, Australia.
Interest rate rises prompt property price declines. – Photo: Shutterstock, Harley Kingston

Analysts are casting an increasingly gloomy eye over the land down under as a range of issues threaten an Australia housing market crash.

Rising mortgage rates, soaring inflation, and a falling appetite from consumers with restricted borrowing capacity could mark a steep correction, with some banks predicting a contraction of 20%. 

When could thel Australia property bubble burst, and how far could prices fall?

What is a housing crash?

A crash occurs when house prices across the market are overvalued, resulting in an aggressive correction that sees prices fall.

There are a number of ways a housing crash can develop. It can result from falling demand, which can be more likely after a period of strong economic growth.

A sudden increase in interest rates by central banks to tackle other economic issues such as inflation can also affect the market, increasing mortgage costs for millions of people, reducing disposable income and spending power.

Housing crashes affect actors in every part of the economy. Investors with money tied up in property and real estate investment trusts (REITs) face devaluations to their portfolios. 

For regular homeowners, a housing crash can push them into negative equity, which means their home is worth less than what they paid for it.

One example of a housing crash was in 2007, when US prices fell more than 15%. A wave of subprime lenders defaulted on their mortgages when repayment rates rose after “teaser” rates expired. This bled into the financial system, causing a global financial crisis. 

That was exacerbated by a large oversupply of homes following excessive building, while a steep rise in unemployment and drops in disposable income hurt demand. It took a number of years for prices to return to pre-crisis levels.

Busts tend to come in a cyclical fashion. There is a theory that property cycles last 18 years, with busts happening when prices rise faster than wages. According to the International Monetary Fund (IMF), these busts can be particularly drawn out, with no defined range for a downturn to end.

A housing crash in Australia could be dependent on these factors over the next year and investors would need to judge where the country currently stands in the property cycle. 

Key indicators showing signs of a slowdown

According to data from FRED, Australia’s residential property performance has tended to fluctuate wildly from quarter to quarter.

Real residential property prices for Australia, 2000 - 2022

The latest data from the Australian Bureau of Statistics implied that the market was still on an upward trajectory in March, with median house prices rising in every capital city, and jumping by nearly 30% in Brisbane and Canberra. 

But economic headwinds have now begun to feed into policy, which could have a direct impact on the demand for housing. 

Could current conditions look like an Australia housing bubble?

Like the US and the UK, Australia is battling the onset of aggressive inflation. It rose to 6.1% in June. In response, the Reserve Bank of Australia (RBA) has embarked on a schedule of interest rate rises, including three consecutive 50 basis point rises at the last three monetary policy meetings, lifting the bank’s base rate to a six-year-high of 1.85%.

Mortgage rates have begun to creep up. The RBA’s rate for variable housing mortgages rose from 2.86% to 3.5% between April and June. Data from Trading Economics suggested that fixed mortgage rates now exceed 6%. 


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In addition, both lending commitments and non-performing loans on housing remained elevated compared with pre-pandemic, according to the Australian government, indicating financial insecurity is still high. 

Real estate stocks

An analysis of real estate stocks in the country may serve as a barometer as to whether an Australia housing market crash is realistic.

The vast majority of Australian real estate stocks have faced heavy downturns this year, reflecting some pessimism in the market. 

Goodman Group (GCG), the largest real estate stock in the country by market capitalisation – nearly A$38bn, as of 23 August – has shed a quarter of its value this year. Even an expectations-beating 15% jump in profits posted in August couldn’t lift the stock, suggesting that investors are more concerned with the future of the market, rather than recent performance.

Other major real estate stocks, like Scentre Group (SCG), Dexus (DXS) and Stockland Corporation (SGP), have declined 14.5%, 20.3% and 16.8% respectively, this year, as of 23 August. While these stocks are all more focused on commercial real estate, it is indicative of the gloomy environment for property. 

Meanwhile Tamawood Ltd. (TWD), a residential housing developer with a market cap of over A$86m, has declined more than 26% in the year-to-date, while developer Simonds Group (SIO) has lost around half its value this year to a market cap of A$28m.

Housing market outlook

The latest analysis from brokers suggests that Australia could be on the verge of a massive overcorrection and housing market crisis. 

Analysis from the National Australia Bank (NAB) published in June showed that the bank expected a 3.7% average decline in house prices across the country’s capital cities, rising to an average of 14% in 2023. 

The bank’s chief economist, Alan Oster, highlighted rising interest rates as the key impediment for buyers, hurting demand.

“The economy and labour market are expected to remain healthy in the near-term, though we expect rates to rise more quickly than previously, reaching 2.1% by year’s end with more to come in 2023,” Oster said. 
“We largely see the adjustment in prices coming through reduced borrowing power, which will bind more in the larger capitals that have larger affordability issues, but do not expect the decline to be disorderly, with no fundamental oversupply at present.”

Oster said supply chain issues and a low supply of workers meant construction could take a hit, which could normally be expected to prop up prices. 

ANZ Bank were even more gloomy in a report by ANZ last week, projecting an Australia property crash as average house prices could fall by 20% next year. 

“The biggest factor driving prices lower is reduced borrowing capacity, not a rise in forced sales,” the research said.
“Arrears rates are coming from a very low base, households have built-up large liquidity buffers, and the rise in the share of loans in negative equity is expected to be modest.” 

The findings, led by the bank’s senior economists Felicity Emmett and Adelaide Timbrell, said there were other factors at play, like a tight rental market, rising immigration and low unemployment, which meant that prices wouldn’t drop further.

The research also pointed out that an increasing share of household income would go towards servicing housing debt, hurting spending further, as well as housing demand.  

“We expect that the average share of household income that goes to mortgage interest payments will rise to nearly 11 per cent at the peak, much higher than the 9 per cent or so paid prior to the pandemic, but well below the 13.5 per cent peak in 2008,” it said.
“Total repayments are also set to rise sharply, with over half of payments on fixed rate loans rising by over 40 per cent once the fixed rate expires, and around 28 per cent of payments on variable loans rising by 40 per cent or more when the cash rate hits its peak.”

Australia housing market crash: The bottom line

While there is some pessimism around house prices across the globe, analysts appear to think they are amplified in Australia.

Current projections of a 20% median fall in prices could suggest the presence of an Australia housing bubble,  one that could be popped as lending becomes trickier amid rising rates, and negative equity levels possibly mount.

Investors in Australian housing stocks and commodities used to build homes may want to reevaluate their portfolio to guard against a potential Australia property crash.

Please remember that analysts’ predictions about an Australia housing market bubble can be wrong. They should not be used as a substitute for your own research. Always conduct your own due diligence before trading or investing. And never trade money you cannot afford to lose. 


When will Australian house prices crash?

Australian banks expected a huge fall, as high as 20%, in house prices in 2023, mainly due to a fall in borrowing capacity, per ANZ bank’s research in August. Note that analysts’ predictions can be wrong.

How often do housing markets crash?

There is a theory that property cycles last 18 years, with busts happening within this framework when prices rise faster than wages. According to the International Monetary Fund (IMF), these busts can be particularly drawn out.

Will Australia house prices drop in 2022?

According to NAB predictions published in June 2022, Australia house prices could drop by 3.7% in 2022, before a much steeper drop in 2023. Note that analyst predictions can be wrong.

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