What the current market really means for you
If you have been following the RBA interest rate forecast for 2022, you already know rates have moved fast. The cash rate has gone from 0.10% to 2.35% in just five months, with four back-to-back 50-basis-point increases along the way. That pace has shaken consumer confidence, squeezed borrowing power, and taken the heat out of property prices across the country. So what do the property market predictions for 2022-23 actually look like, and what does it all mean for your next move? Here is a clear, honest breakdown of where things stand right now.
Property prices right now
The numbers are moving. According to the Australian Bureau of Statistics, the average dwelling price dropped by $18,900 in just the June quarter alone. That is a meaningful shift in a short space of time.
Sydney has felt it the hardest, with median dwelling values down 7.4% from their peak. Melbourne is not far behind at 4.6% below peak. The Commonwealth Bank has forecast that Sydney and Melbourne prices could fall around 11% across 2022, and potentially reach an 18% fall by the end of 2023 if conditions stay as they are.
Nationally, many economists are pointing to a 15% to 25% correction over the next couple of years. Those are big numbers, but context matters. Most of the markets that are correcting saw extraordinary growth during 2020 and 2021, so these falls are bringing values back to more sustainable levels rather than signalling a crash.
The spring selling season, which traditionally gives the market a boost, is not expected to reverse the trend this year. Auction clearance rates are sitting around 62.5%, which is well below the levels that drove prices higher in 2021. The shift from a sellers market to a buyers market is well underway, and that is not going to flip overnight.
Where interest rates are headed
Most market experts are tipping the RBA cash rate to settle around 2.85% in the near term. Inflation is forecast to stay elevated at 7% to 8% through the rest of 2022, before dropping back toward 4% in 2023. The RBA has made it clear it will keep tightening until inflation is under control, so more rate rises are likely before the end of the year.
For variable home loan rates, that translates to rates landing somewhere around 5.5% for most borrowers. Fixed rates are not expected to shift dramatically from current levels, with some products sitting near or above 6%. If you took out a fixed rate loan in 2020 or 2021 at a historically low rate, the jump when you roll off onto a variable rate could be significant.
Understanding why your borrowing power has declined is important right now. Lenders assess your serviceability at a rate 3% above the current rate, so as rates rise, the gap between what you were pre-approved for a few months ago and what you qualify for today can be surprisingly large. If you got a pre-approval earlier this year, it is worth having your broker check whether that figure still holds.
What this means for first home buyers
If you are a first home buyer, there is a genuine silver lining here. Falling prices mean lower purchase prices, and lower purchase prices mean smaller loans and lower monthly repayments, even with higher interest rates in the mix. The market that felt completely out of reach 12 months ago is becoming more accessible.
That said, there are a few things to keep in mind.
Use the Borrowing Power Calculator to see where you stand today, not where you stood six months ago. Borrowing capacity has dropped noticeably with each rate rise, so your numbers need to reflect current conditions.
Construction costs are also elevated. Building costs rose 10% nationally in the 12 months to June 2022, which affects both new builds and the cost of renovating. If you are weighing up buying an established home versus building, factor that in.
The bottom line for first home buyers is that patience and preparation will serve you well. If you can afford repayments now, buying sooner rather than later may pay off. Once inflation is brought under control and rates stabilise, property prices are expected to recover. Getting in before that happens, while prices are still falling, could work in your favour over the long term.
The opportunity for property investors
For investors, the combination of falling purchase prices and rising rents is creating a window worth paying attention to. Rental vacancy rates are sitting at around 1% or below in many parts of the country, and rents are rising quickly as demand for rentals outpaces supply. That means your yield potential is increasing even as purchase prices soften.
Investors also have an advantage that owner-occupiers do not: interest is tax deductible. That takes some of the sting out of higher borrowing rates and can make the numbers stack up even in a rising rate environment.
Some buyers are taking a creative approach, purchasing an investment property now in a location they plan to move into eventually, while generating rental income in the meantime. That strategy gives you a foot in the market while keeping your options open.
Demand for medium to high density housing is also on the rise as renters adjust to affordability pressures. If you are looking at apartments or townhouses, the fundamentals are looking strong from a rental demand perspective.
One note for investors considering Queensland: recent changes to land tax laws have created additional costs for interstate investors, which has led some to sell up and reduced buying activity in the state. For local buyers or those looking at Queensland as a primary purchase, that could mean less competition and more choice. Renters in Queensland are likely to feel the pressure if investor supply drops, but for buyers it creates an opportunity.
The broad market shift from a sellers market to a buyers market means you have more room to negotiate than you would have had in 2021. Sellers who need to sell are negotiating. Conditions like this do not last forever.
Why a crash is unlikely
The word “crash” gets thrown around a lot when prices fall, but the conditions that cause a true property market crash are not really present in Australia right now. A crash typically requires a flood of forced sellers, people who have to sell at a loss because they cannot afford their repayments. That is not what we are seeing.
Employment levels remain very low. Wages are growing. Most households built up savings buffers during the pandemic, and many home owners are ahead on their mortgage repayments. The economy is stable. Most people who are selling right now are choosing to, not being forced to.
What we have is a correction. Prices rose very quickly and are now adjusting. That is a normal part of a property cycle, and while a correction of 15% to 25% sounds large, many markets are still well above where they were in 2019. The medium to long term outlook for Australian property remains positive.
The most likely timeline, based on current forecasts, is that the downward trend continues until at least spring 2023, with a potential recovery not really taking hold until 2024. That is a meaningful window if you are in a position to act.
Lenders are also tightening their processes in this environment. Two of the big four banks now require contact before they will complete a refinance, so allow more time for those transactions than you would have needed previously. Your broker can navigate that for you and make sure the process moves smoothly.
Common questions
Q: Will property prices keep falling into 2023?
Most forecasters expect prices to keep softening through 2023, with a recovery unlikely before spring 2023 at the earliest and more likely in 2024. The pace and depth of falls will depend on how quickly inflation comes under control and how many more rate rises the RBA delivers. Check out our article on the property market slowdown from earlier in 2022 for more context on how the trend developed.
Q: Is now a good time to buy a property in Australia?
That depends on your situation. If you have stable income, a solid deposit, and can comfortably service the loan at current rates, buying now gives you access to a market where prices have already come off their peaks. There may be further falls ahead, but timing the absolute bottom is nearly impossible. The key question is whether you can hold the property long enough for prices to recover, which historically they have.
Q: How much has my borrowing power actually changed?
Significantly for most people. Each 50-basis-point rate rise reduces borrowing capacity by roughly 5%. Across five consecutive rises, that adds up fast. If you were pre-approved earlier in 2022, your current borrowing power is likely lower than that figure. Use our borrowing power calculator to check where you stand today, or reach out and we can run the numbers with you.