The latest home value results are overwhelming reading for anyone who has recently taken out a large loan to buy a home.
Home values nationally fell 1.6 percent for the month, the fourth consecutive monthly decline. Losses were driven by Sydney (-2.3 per cent), Brisbane (-1.9 per cent) and Melbourne (-1.2 per cent), with Perth (-0.2 per cent) and Adelaide (- 0.1 percent) were also eventually added to the correction. , show data from CoreLogic.
The quarterly rate of decline accelerated to 3.9% at the five-city aggregate level, driven by sharp declines in Sydney (-5.9%), Melbourne (-3.8%) and Brisbane (-2.5 %).
Conversely, Adelaide (1.6 per cent) and Perth (0.4 per cent) remained in positive territory; albeit with the rate of growth fading fast.
The quarterly fall in house values is the steepest since 1983 for the five cities combined and across Sydney, while Melbourne’s quarterly decline was the fastest since February 2019 and Brisbane’s since 2008 .
House values are now 4.2% below their April peak at the five-city aggregate level, with Sydney 7.4% below the peak, Melbourne 4.6% and Brisbane 2 .7%
How Australia’s housing correction compares to history
The charts below plot the current housing corrections in Sydney, Melbourne and the five-city aggregate level (black lines) with previous episodes, using the monthly CoreLogic Hedonic Index.
Sydney’s current 7.4 per cent correction has a long way to go before it reaches the depths of the 1982-83 crisis (-17.4 per cent in 11 months) or the 2017-19 correction (-14.9 percent in 23 months). However, the pace of decline is the second fastest on record for this phase of the downturn (after seven months), and the pace of decline has also accelerated sharply in the last quarter.
Melbourne’s current 4.6 per cent correction also has a long way to go before hitting the biggest falls recorded in 2017-19 (11.1 per cent over 19 months) and 1989-92 (9.8 per cent in 21 months). The pace of decline in the current six-month correction is also the fourth-fastest on record.
Finally, while the current correction of 4.2% over four months at the aggregate five-city level is nothing special compared to the corrections of 2017-19 (10.7% in 21 months) or 1982-83 (8 .7% in 10 months), is the fastest decline at this stage of the cycle that has been recorded.
Australia faces biggest house price correction on record
Ultimately, the depth of this housing correction will depend on how aggressively the Reserve Bank of Australia (RBA) raises interest rates, as higher mortgage rates reduce borrowing capacity and they reduce the demand for housing.
Economists and the market are widely expecting the RBA to raise the official cash rate (OCR) by another 0.5 percent next week to 2.35 percent, marking the fifth consecutive increase.
From there, opinion is divided. CBA, AMP and NAB believe OCR will peak at 2.6%, while ANZ and Westpac forecast a peak of 3.25% in early 2023.
The bond market is even more bullish, with a peak OCR of 3.80 percent in mid-2023.
How high will the mortgages go?
According to CBA, AMP and NAB OCR’s lowest forecasts, Australia’s average variable discount mortgage rate would rise to 5.95%, compared to 3.45% in April 2022 immediately before the first RBA rate hike.
Higher OCR forecasts from ANZ/Westpac and the bond market would send the variable mortgage discount rate to 6.70% and 7.15% respectively.
The RBA’s latest Financial Stability Review estimated “that a 200 basis point rise in interest rates from current levels would reduce real house prices by around 15 per cent over a of two years”.
Australia therefore faces a maximum to minimum fall in real house prices of between 20% and 30%, according to these OCR forecasts, or between 12% and 20% in terms of nominal, if inflation remains high.
The more expensive markets of Sydney and Melbourne would likely see a bigger drop than the national average, and the more affordable markets would fare better.
Regardless, Australia faces the biggest house price correction on record, the final size of which depends on how aggressive the RBA is.
Leith van Onselen is Chief Economist at MB Fund and MB Super. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
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