Australia Housing Market Enters First Downturn in Over Three Years

The Australian property sector correction

The Australian property sector is undergoing a correction, ending a three-year period of uninterrupted price growth. As reported by Domain, the national downturn is characterized by a 1.4 per cent drop in capital city house prices and a 1.2 per cent decline in national unit prices during the June quarter. This shift represents a departure from the record highs seen in recent years, with listings increasing and homes taking longer to sell. Nicola Powell, Domain’s chief of research and economics, told The Business that the data indicates the nation is now in a downturn.

Regional Variations in Market Performance

While the downturn is widespread, the impact remains inconsistent across major capital cities. Dr. Powell noted that the cooling is most pronounced in Sydney, Melbourne, and Canberra, which are really leading the downturn. In contrast, Adelaide stands out as the only capital city where house prices accelerated during the June quarter. Despite the broader cooling, house prices remained at record highs in Adelaide, as well as in Brisbane, Perth, and Hobart. Dr. Powell added that while other capital cities are recording growth, that growth is much slower compared to what was previously seen.

Investor sentiment in the unit market

The trend is particularly stark within the unit market. According to the latest findings, unit prices fell in every capital city except for Darwin. Dr. Powell suggested this indicates a shift in investor sentiment, noting that investors have become nervous and are shying away from the housing market. She further observed that this may be having a ripple effect on first home buyers, who are adopting a cautious approach. “I think there would absolutely be nervousness out there amongst first home buyers, that cautious approach, but I also think that behavioural response from first home buyers, thinking if they wait a little bit longer and prices pull back even further, they may get actually more for their money,” Dr. Powell said.

Cameron Kusher on the perfect storm

Economic Pressures and the Outlook for Buyers

Property economist Cameron Kusher anticipates that the current downturn may be one of the largest in many years. Writing on Wednesday, Kusher described the current climate as a somewhat perfect storm of low affordability, low sentiment toward housing, a weakening economy with terrible productivity growth, reduced incentives to invest in housing, relatively high interest rates, and high inflation that looks set to continue for some time.

I think this downturn is set to be one of the largest we've seen in many years … [and] will turn out to be larger than the 7.5 per cent downturn seen a few years back, Kusher wrote. He further explained that when the market switches to a buyer’s market, it takes time for activity to return. “Typically, what we find is that as prices are falling, there remains very little buyer activity. But when prices start to recover a little bit, that’s when we start to see people pile back in. The issue is that people don’t like buying in a falling market,” added Conisbee.

Despite the downward pressure on prices, experts remain cautious about immediate improvements in housing affordability. Kusher noted that because dwelling values increased so much and so quickly over recent years, and because interest rates are unlikely to be reduced for some time, the current price drops are unlikely to translate to greatly improved affordability. Historically, downturns in the national market have been short-lived, with recovery typically driven by interest rate reductions or significant market stimulus.

Jonathan Mott at the Senate Committee

Barrenjoey Analysis on Market Sustainability

The broader economic implications of a housing slowdown were addressed by Jonathan Mott, a banks analyst at Barrenjoey. On Monday, Mott told a Senate Committee into productivity that a housing slowdown would have a positive impact on the sustainability of Australia’s housing market. As the market adjusts to these new conditions, the focus remains on the specific consequences of the downturn, which include potentially weaker household consumption, higher unemployment, and eventually lower inflation, though these outcomes are expected to take time to materialize.