Before I make a for why property values will continue to decline in 2023, I will offer a caveat, that forecasts are often misaligned with what plays out. Cast your mind back to 2008 after the Global Financial Crisis when real estate commentators and economists predicted a 30% drop from previous highs. This grim prediction was based on the collapse of the United States housing bubble, excessive risk-taking by global financial institutions, and the general sense that global impacts will act as a contagion for Australian property markets.
What ultimately eventuated post-2008 however, was a 16% drop from previous highs, a far cry from the predicted 30% drop. Some key things to note, are that few forecasts factored in an aggressive global response to the economic crisis by governments and central banks of major economies, as well as the insulation of Australia’s economy by China – fueled by its thirst for Australian minerals. These factors cushioned Australia’s property market, resulting in a correction of property values rather than a ‘bursting of the bubble’ property crash.
Similarly, 2020 also spurred predictions of a property market crash. Economists cited the impacts of COVID-19 causing a significant structural adjustment in employment markets, a decline in market activity resulting in lower economic growth, and supply-side inflation. What ultimately eventuated in 2021 was the strongest annual growth in property prices on record[1].
The phrase “take this with a grain of salt” provides perfect commentary on the forecasts of property prices in 2023.
[1] ABS, ‘Strongest annual growth in property prices on record’ (March 2022)
The Real Estate Market in 2022
CoreLogic reports that Australian housing values experienced a decline of 5.3% in 2022, marking the first annual drop in property values since 2018. Capital cities, including Sydney (-12.1%) and Melbourne (-8.1%), led the losses, followed by Hobart (-6.9%), Canberra (-3.3%), and Brisbane (‑1.1%). However, some cities, such as Adelaide (10.1%), Darwin (4.3%), and Perth (3.6%), saw gains. While 2022 did see a sharp decline in housing values, this was off the back of 2021 which had the strongest annual growth in property prices on record. The decline in property values in 2022 can be considered a correction from recent property value highs.
It is uncertain what the future holds for housing prices, but there are indications that national prices may continue to decrease in 2023 due to factors such as rising household expenses brought on by increasing interest rates and inflation, and negative consumer sentiment caused by global uncertainty and the potential for a recession.
The Impact of Interest Rates on Property Values
In March 2022, the official cash rate was 0.10% with the average discounted variable rate standing at 3.45%[1]. As of 30 January 2023, the RBA has set the official cash rate at 3.10%, with a 61% expectation of a further increase to 3.35% at the next RBA board meeting on 7 February 2023[2]. It is the first time since 2012 that the official cash rate has exceeded 3.00%, and the steepest hike since 1992.
Currently, the range of variable home loan rates is from 5.64% to 6.45%. If one were to take out a $400,000 loan in March 2022 at a variable interest rate of 3.45%, this would represent $13,800 in interest or a $265 weekly payment. A $400,000 loan now at a 6.45% rate represents $25,800 in interest or a $496 weekly payment. This represents an increased weekly expenditure of 47% based on a 3% increase to average loan rates.
The steep hike in the official cash rate resulting in increased home loan rates is especially problematic for those experiencing mortgage stress[3], with 22.6% of mortgage holders now ‘At Risk’, as of October 2022. [4]. While the RBA has argued that most households should be able to “weather increased pressure on their finances for at least 2 years”, many households are turning to debt to address the cost-of-living pressures through credit cards, personal loans, consumer credit, and buy-now, pay later[5] arrangements, exacerbating household expenditure further.
While it is unlikely that a mass sale of properties from those under mortgage stress is imminent, it is also unlikely that the situation for these households will improve any time soon. Households under mortgage stress are unlikely to purchase properties until their financial situation improves, having a downward pressure on the demand for real estate, and dampening property value growth. Further, households with unsustainable household expenditures may be required to sell their properties at a discount in a weakened real estate market.
The impact of increasing home loan rates will also worsen as interest rate hikes flow through to households with fixed term loans as terms for fixed loans expire, with households having to suddenly account for a sharp increase in repayments. According to the RBA, over 50% of households with a fixed rate that expires in 2023 will face a 40% increase in mortgage repayments. While it is difficult to determine the exact impact this will have on the real estate market, it is possible that that a large portion of this demographic will also encounter mortgage stress.
[1] ABS, Leading indicators (November 2022)
[2] RBA Rate Tracker (January 2022)
[3] Mortgage stress is defined as a household spending more than 30% of its pre-tax income on home loan repayments.
[4] Roy Morgan, ‘‘Mortgage Stress’ is growing in 2022 and set to rise further as the RBA continues to increase interest rates’, (September 20, 2022)
[5] Equifax Consumer Credit Demand Index (October 2022)
The Impact of Inflation on Property Values
Further pressure on household expenditure derives from inflation, which reached 7.8% over the year to the December quarter of 2022. Inflation was primarily driven by disruptions to global supply chains, resulting from the impacts of COVID-19. For perspective, inflation in November 2021 was around 2.8%.
The rise in inflation has resulted in households having to pay more for living expenses, diverting funds away from discretionary spending, such as the purchasing of real estate. Increases in the price of necessities may contribute to further household expenditures, on top of increases to mortgage repayments as covered earlier.
While the RBA has stated that it has increased interest rates to reduce inflation, economists have speculated that inflation will only decrease with improvements to supply chains impacted by COVID-19. Substantial improvements to COVID-19-affected supply chains may take years.
Negative Consumer Sentiment
There is pessimism in consumer sentiment with the “time to buy a dwelling” index sitting at 84.3, a 17.0% drop from recent highs in February 2022[1]. This negative sentiment is largely driven by uncertainty on whether there will be a further tightening of interest rate policy, the end of Government incentives implemented to combat the negative impacts of COVID-19, and the likelihood of a global recession in 2023. The negative consumer sentiment points to a further contraction of property values, as households withhold discretionary spending in anticipation of darker economic times.
Summary
It is a difficult task to predict what the property market will do in 2023, especially when new evidence may arise with the passage of time. Next week I will cover the argument for a more bullish view of the property market in 2023 and examine economic forces that may insulate the property market from a crash and potentially propel the market from 2024 onwards.
Note that while this article makes broad generalisations of the property market in 2023, each property has individual characteristics and attributes that will impact its value on a micro level. To determine the true value of your property, contact Vanguard Valuations where we look at both macro trends and micro considerations for your property valuation.
[1] RBA, Australia Consumer Confidence (January 2023)