Housing Market Plunges 8.4% - Biggest Decline in 40 Years!

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The Reserve Bank’s aggressive move to raise interest rates has caused the worst housing market dip in over 40 years. Since May 2022 up until January 2023, the fall in home values across Australia was the greatest on record, which according to CoreLogic data, dates back to 1980. This fall surpasses the downturn prompted by the financial crisis back in 2007-2008 as well as the drop between 2017 and 2019.

Sydney home values felt the greatest impact of the interest rate hikes, with a drop of a staggering 13%. Brisbane also experienced a dip of 10%, while Melbourne’s declined by 8.6%. The 300 basis points increase in the interest rate have made it difficult for prospective buyers to borrow funds and decreased their overall confidence in the market significantly. Additionally, high household debt has heightened the sensitivity of the market to changes in interest rates. CoreLogic’s head of research, Eliza Owen, argued that the inflationary pressures, along with the post-lockdown surge in spending, have reduced the amount of household savings that could be put towards a housing loan. The market is yet to hit its lowest point, as further increases in the cash rate are likely to make the situation worse in 2023. The market is currently pricing a cash rate peak at 4%, although economists estimated it to be around 3.6%. This indicates that increases in interest rates are going to make the housing downturn longer, and making it harder for buyers to finance their purchases. Aside from high borrowing costs, rising building costs, as well as falling property prices, continue to be a major challenge for the construction industry. As a result, housing approvals have dropped by 21.7% since August 2022, with the biggest decrease experienced in the private attached dwellings segment(-22.7%). Approvals for private sector houses also dropped by 2.5%. Master Builders Australia's CEO Denita Wawn highlighted that these numbers are the result of the so-called “economic pressures” the industry is facing, which include the interest rate hikes, labour and material shortages. While the return of overseas migration will no doubt aid the housing market, it will likely lead to further strain on the rental sector. According to Craig James of CommSec, building approvals are liable to continue decreasing as worsened financial conditions dampen the demand for housing and increase borrowing costs. That being said, the magnitude of the impact will depend on the number and strength of overseas migrants returning home.