The worst is yet to come for the housing market

13 views 2022-08-30 15:38:34

Predictions of the housing market bottoming out soon are premature because the worst impact of higher interest rates is yet to come, experts say.

The recent rise in auction clearance rates and improvement in the drivers of inflation had prompted some industry insiders to declare that the housing downturn was about to end and that prices would fall by smaller amounts.

Auction clearance rates climbed to 58.8 per cent, a 12-week-high, last weekend, according to CoreLogic. Ray White data showed the number of bidders had risen to 2.5 per auction since bottoming out last month.

“I think we are close to the bottom,” said Ray White chief economist Nerida Conisbee.

“With inflation drivers improving and markets feeling more confident about the outlook, it does look like the housing downturn may be over sooner than expected.

“The chances of a sustained downturn and giant declines in prices look to be steadily dissipating.”

Inflation ‘pulling back’

Ms Conisbee said there had been a noticeable decrease in petrol prices, and supply chains seemed to be moving a bit quicker over the past seven weeks.

“Crude oil prices have fallen from the peak of almost $US120 per barrel to around $US90, a drop of 25 per cent. The Baltic Dry Index, which measures the cost of shipping worldwide, has dropped almost 80 per cent,” she said.

“Given how significant fuel and supply chains were to our high inflation, this gives us an insight into how our high inflation may be over sooner than later. With inflation starting to pull back, so too does the need to raise interest rates.”

But AMP chief economist Shane Oliver said the recent rebound in clearance rates was not an indication of a stabilising market.

“There were bounces in clearances in the 2011 and 2017-19 property down cycles that did not signify imminent upswings,” Dr Oliver said.

“I suspect the bounce in the last few weeks reflects the combination of bargain hunters and vendors lowering their prices as it has come on lower volumes and interest rates are still rising.

“I continue to see average home prices falling 15 per cent to 20 per cent top to bottom, with the low most likely in the second half of next year after the RBA stops hiking and starts cutting rates, which is not expected until the second half of next year.”

While the auction clearance rates lifted in the past few weeks, they were still below the benchmark where prices could rise again, said Nicola Powell, Domain’s chief of research and economics.

“I think talk of the market bottom is a bit optimistic,” Dr Powell said. “Yes, we have seen clearance rates stabilise in recent weeks, but they are still below 60 per cent, which is a level that indicates price inflation. At the current level of 58 per cent, it indicates that prices are still going to fall.”

ANZ research senior economist Felicity Emmett said despite some encouraging signs, the worst of the downturn was far from over.

“I think it’s very premature to be calling the bottom of the housing market when many participants in the market would hardly have even felt the impact of rate rises yet,” Ms Emmett said.

“It takes a little while for the rate rise to flow through to mortgage repayments. The May rate rise probably didn’t result in higher mortgage repayments until late June or July.

“With more rate rises expected, it’s really hard to see property prices bottoming out until at least the cash rates have stabilised.”

ANZ expects interest rates to peak later this year at 3.35 per cent, which will slash borrowing capacity by 30 per cent.

“That is really going to limit how much people can take to an auction or private sale,” Ms Emmett said. “I don’t think there’s any getting away from that, that’s why we think the downturn has a lot longer to run.”

ANZ is predicting Sydney house prices to fall 20 per cent peak-to-trough, Melbourne, Adelaide and Hobart 17 per cent each, Brisbane, Perth and Darwin 12 per cent each, and nationwide 17 per cent.

SQM Research managing director Louis Christopher said the housing market could bottom out earlier if the RBA paused the interest rate increases.

“I think we are getting closer to a rate pause where the RBA just sit on their hands for a few months to see what the data looks like, and it’s got everything to do with inflation,” Mr Christopher said.

“So it’s quite possible that the market could bottom out sooner and even recover just on a pause in interest rate rises. If we were to see the RBA pausing at the next meeting or the one in October, that could improve confidence and stimulate the housing market.”

This article is from Australian Financial Review, please click the following link for the original article: https://www.afr.com/property/residential/the-worst-is-yet-to-come-for-the-housing-market-20220825-p5bcox

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