Is the Australian Property Market Headed for a Crash?

The Australian property market has really gone up and down in the past few years. It had started as a boom after the onset of the COVID-19 pandemic, cooled down, and then back into a growth phase in 2023, making the market's journey nothing but a non-linear curve. However, with an outlook concerning affordability and increasing interest rates, it is far from doom and gloom. By understanding what drives the market and how each city performs, Australians can be kept in the know and optimistic about their property investments.

The Recent Trends

Nationally, according to CoreLogic, annual growth in property prices reached 7.6% up to July 2024; however, this masks rather mixed results across Australia's vastly different markets. Results at Melbourne were rather modest at 0.2%, Canberra was 1.7% better, while Perth had a remarkable 24.7% surge. Sydney's market also presented strong annual growth of 5.6% up to July, showing a resilience during trying circumstances.

Domain economist Dr Nicola Powell referred to this as a "multi-speed market," where different capital cities are experiencing some of the price growth differently, some rising faster, and even some going backwards. She said it was natural to see these divergences, city by city, even within cities. "It means basically that, compared to another market, some are growing faster than others, and some are even falling," she said. "And affordability is still the major takeaway in terms of pace of price movements.".

For example, in Sydney, unit prices have declined slightly in the last quarter, the first decline in half a year. This is also reflective of growing wariness on the part of buyers regarding the liability levels they are willing to incur. While house prices continue to climb, much of the momentum lost by the market is at the hands of pressures on affordability.

Interest Rates

Indeed, interest rates are the most significant driver for the current market. The Reserve Bank of Australia's move to keep its rates steady during August was not so pleasant for the majority of Australians who face a hefty mortgage repayment burden. Cash rate, for instance, had been set to increase steadily from 0.35% in May 2022 to 4.35% in November 2023.

Observers who believe interest rates will only truly soften into late 2024 or early 2025 argue that even when they are lower, rates will not decline to pandemic levels and exceptionally low levels. Says Tim Lawless, director of research at CoreLogic: "Rates are not coming back down to the same incredibly low level as they have been in the recent past.". "The long period of declining rates was a key element that contributed to the significant run of growth in property prices leading up to and during the pandemic," he explains. "We're unlikely to see a similar situation play out in the near future."

The rising interest rates have led to higher financial caution among buyers as many wait and see, but Lawless believes the adjustment period will bring about balance to the market and allow the market to stabilize rather than bring forth a drastic change.

Is the Market Crash on the Horizon?

With rising interest rates and growing concerns over affordability, most people are asking whether the Australian property market is headed for a crash. However, as Lawless and Powell point out, the outlook is cautiously optimistic while the market is under pressure. One of the significant issues affecting the market has been housing supply, targeted by the federal government's Housing Support Program.

In July 2024, the government set its ambitious national target at 1.2 million "new, well-located homes" over the next five years, claiming that the programs would end the country's continuous shortage of housing and make it affordable to homebuyers. Federal and state governments commit to increasing supply and easing pressure on prices, according to Lawless.

According to Powell, by any measure, a median house price of $1.66 million in Sydney is extraordinary. She explained that sellers are listing more properties due to high prices but the rate of absorption has slowed. "New listings are coming onto the market, but they're not being sold as quickly. This indicates that buyers are exercising caution and weighing their options," she says.

This may mean a trend change in the markets. With the surge in supply-side, price acceleration often slows down or even goes into slight decline in some markets. Melbourne's Home Value Index slumped 0.9% in July quarter, and according to Powell, this is because affordability constraints have melded well with the more responsive supply pipeline.

How Low Could They Go?

The market is having its own share of headwinds. Still, it's not going to be a serious market crash. They actually feel that it would go into the phase of moderation whereby some corrections might happen with stability in the prices, not too dramatic though, particularly region by region. Powell does not even find this to have enough effects in the decline in house prices even when government intends to target 1.2 million new houses by now.

That's exactly what Australia needs to solve the housing shortage the country has been experiencing for a long time, she says. "It's more about fulfilling demand instead of causing a substantial pullback in prices.".

That is what Lawless also says, arguing that in Australia historically, property price declines rarely run past 15% from peak to trough. Once the market corrects, it generally enters a new growth phase. "The pendulum has a tendency to swing," he says. "We are currently in a period of undersupply. In a few years, we might find ourselves in an oversupply situation, which could lead to some downward pressure on prices."

However, he would be quick to add that an overall decline of 10% to 15% would simply mean a rise for the buyer looking at affordability. "It won't be a crash or a collapse, but correction in the system needed to get prices back into a sustainable trajectory," he adds.

The Silver Lining: Economy Under Change

Notwithstanding rising interest rates and affordability constraints, reasons abound for optimism in the future prospects of the Australian property market. Chief among these factors, one would consider the proactive role taken by the government and industry in redressing supply shortages and managing market risks.

A huge commitment by the federal government to build 1.2 million new homes over the next five years will help reduce the shortage to a substantial degree. State efforts to push housing stock up will likely have the supply slowly caught up by demand, and thus price growth will be better moderated.

Currently, market conditions make it easier for buyers to be more cautious and thus make better choices. Since more properties are becoming available and affordability is the key, buyers are in a better position to negotiate and have a home within their budget.

What does this mean for buyers and investors?

Prospective buyers can find it challenging yet rewarding at the same time. Higher interest rates equate to lesser borrowing ability, but slower price growth creates a window of entry into a relatively stable market. Experts always recommend that long-term goals should guide property decisions and other factors like location, infrastructure, and future growth potential.

Investor caution and strategic research are advisable in the case of such a multi-speed market scenario. Large market growth in cities like Perth is offering much better investment opportunities; however, in other markets, it may be cautiously ventured into. Local trend knowledge as well as knowledge of government policies and dynamics in the marketplace will be very important aspects to make intelligent decisions on investments.

Key Takeaways and Future Prospects

In brief, however, challenges to the Australian property market are not necessarily as dire as some people may have feared. Growth in interest rate has indeed compelled affordability. Meanwhile, however, it also brought about much-needed market recalibration to the front line. On this score, the increase in housing supply and efficiency of addressing affordability is excellent work from the government.

More pessimistic are experts like Dr. Nicola Powell and Tim Lawless, who believe the future will be more moderate and stable rather than a sharp decline. They argue that any property market is destined to have cycles, and periods of adjustment are part and parcel of this cycle.

For the buyers and investors, the big take-home is to be adequately informed, be patient, and take a long view of the market. The several challenges implicated in this environment have an offsetting opportunity open to players who are willing to do proper research and change their conditions and adapt to changes in the situation.

Conclusion

The Australian property market is currently experiencing a shift. Different cities are growing at rates that are not consistent, and rising interest rates along with renewed focus on affordability are prompting less breathless action. While this is uncertainty, it is also when positive changes begin to happen; more housing supply, restrained, and balanced approaches to buying property.

The experts believe that the market is entering a period of recalibration where prices will stabilize or make minor corrections in some areas instead of a crash. The exercise will correct affordability, and the market will then stabilize in the longer term.

As we look ahead in the future, there is a need to remain constructive and optimistic towards the assets that are witnessing a keen sense of development in the property market. To carry this landscape, Australians need to stay informed and plan for the future while embracing whatever opportunities arise.