The Australian housing market continues to deflate following the Reserve Bank of Australia’s (RBA) decision last week to hike interest rates by 0.25%.
As noted this morning, the preliminary auction clearance rate hit its lowest level of the year this weekend, led by sharp falls across Sydney and to a lesser extent Melbourne.
Mortgage demand had also weakened sharply prior to the rate rise, which historically has portended falling house prices:
SQM Research managing director, Louis Christopher, has become increasing bearish, now forecasting a 7% to 8% fall in Sydney and Melbourne house prices this year amid a sharp drop-off in buyer demand amid soaring mortgage costs:
“Fewer buyers would enter the market as it becomes more difficult to qualify and service a big mortgage”.
“The overall hurdle rate to test home loan applicants will go up and disqualify an increasing number of would-be home buyers and investors, and this in large part is what is going to drag the market down for the rest of 2022 and perhaps beyond.”
Tim Lawless, Director of Research at CoreLogic, also believes that rising mortgage rates are causing buyers to “pull back” from the market, which is being reflected in falling auction clearance rates:
“The interest rate decision has put further pressure on the housing market, which was already slowing prior to the rate rise”…
“Rising interest rates and high inflation are eroding household balance sheets, which is causing buyers to pull back”.
“The correlation between clearance rates and the pace of value growth is really strong, so the falling auction clearance rates portend declines in prices, particularly in Sydney and Melbourne.”
Meanwhile, Sydney auctioneer, Clarence White, noted that fewer buyers are bidding at auction amid falling confidence:
“I’ve really noticed that when there are only a small number of bidders, like what we’re seeing now, people back away very quickly and they hesitate to bid”.
“Buyers’ confidence is very low at the moment.”
With most economists tipping the RBA to lift interest rates by at least 200 basis points, mortgage repayments could soar by one-third or more. Accordingly, buyer demand will collapse further, driving a deeper correction in Australian housing values.
The impacts will be greatest in Australia’s largest and most expensive housing markets, Sydney and Melbourne, where buyers are most over-stretched and sensitive to rate rises.