Home price growth has begun to slow down, with values falling across the country in May according to the latest data from CoreLogic.

National home prices fell -0.1% in May, dragged lower by Sydney (-1.0%) and Melbourne (-0.7%), while Canberra (-0.1%) recorded its first monthly decline since July 2019.

Adelaide was the top-performed market in the country once again, seeing values increase 1.8%, followed by Brisbane at 0.8%. The smaller cities are still rising, however, their growth was not enough to offset falls in Sydney and Melbourne.

Sydney has been recording progressively larger monthly value declines since February, while Melbourne has fallen across four of the past six months.

Since peaking in January, Sydney housing values are down -1.5%, but remain 22.7% above pre-COVID levels. Comparatively, Melbourne, which experienced a softer growth phase, has recorded a smaller peak-to-date decline of -0.8%, with housing values now 9.8% higher compared to the pre-COVID level.

Source: CoreLogic

CoreLogic’s Research Director Tim Lawless said despite the 0.5% rise in housing values across Australia’s combined regional areas, it was not enough to keep the national index in positive monthly territory.

“There’s been significant speculation around the impact of rising interest rates on the property market and last month’s increase to the cash rate is only one factor causing growth in housing prices to slow or reverse,” Mr Lawless said.

“It is important to remember housing market conditions have been weakening over the past year, at least at a macro level.”

Mr Lawless noted the quarterly rate of growth in national dwelling values peaked in May 2021, shortly after a peak in consumer sentiment and a trend towards higher fixed mortgage rates.

“Since then, housing has been getting more unaffordable, households have become increasingly sensitive to higher interest rates as debt levels increased, savings have reduced and lending conditions have tightened,” he said.

“Now we are also seeing high inflation and a higher cost of debt flowing through to less housing demand.”

Regional Australia has also come off peak growth rates, Mr Lawless said, with the annual growth trend easing to 22.1%, down from its January peak of 26.1% and likely to trend lower through the rest of the year.

“Considering we are already seeing the pace of growth easing across most regional markets, it is likely we will see growth conditions softening in line with higher interest rates and worsening affordability pressures,” he said.

“Arguably some regional markets will be somewhat insulated from a material downturn in housing values due to an ongoing imbalance between supply and demand as we continue to see advertised stock levels remain extraordinarily low across regional Australia.”

Listings on the Rise

Sydney and Melbourne have been seeing a surge in new listings, while across the country advertised stock levels remain -10.3% below levels seen this time last year and -28.4% below the previous five year average.

In Sydney and Melbourne listings are now higher than 12 months ago and against the five-year average.

“With stock levels now higher than normal across Australia’s two largest cities, buyers are back in the driver’s seat,” Mr Lawless said.

“Higher listings add to tougher selling conditions more broadly.

“Vendors in Sydney and Melbourne have faced lower auction clearance rates since mid-April and those selling via private treaty are taking longer to sell with higher rates of discounting.”

Outside of Sydney and Melbourne, stock levels remain below average, especially in the cities where housing values are rising the fastest: Adelaide (-39.5%), Brisbane (-38.2%) and Perth (-34.7%) all have advertised stock well below the five-year average.

Along with rising listings, sales numbers are also starting to slow down according to Mr Lawless.

“Our estimate of home sales nationally over the three months to May is -19.2% below the same period a year ago, but still 12.1% above the five year average,” he said.

“A combination of higher interest rates, lower rates of household savings and a potentially more cautious lending environment is likely to reduce housing demand further just as total advertised stock levels are likely to continue rising, further empowering buyers by creating increased competition amongst vendors.”

Source: CoreLogic

Rents Still Rising

While housing value growth has slowed, rents continue to rise up 1.0% in May, taking the quarterly rate of growth to 3.0%. The annual change in rents is now tracking at 8.8% across the combined capital cities and 10.8% across the combined regions.

“As rental affordability pressures mount, demand for higher density rentals has steadily grown due to the unit sectors’ relative affordability advantage,” Mr Lawless said.

“More recently, demand has been boosted by international arrivals returning to the rental market.”

As interest rates normalise over the next 12 to 18 months, the expectation is most of Australia’s capital cities will move into a period of decline brought about by less demand.

With the housing debt to household income ratio at record highs, household balance sheets are likely to be more sensitive to rising interest rates.

“With the RBA set to steadily raise the cash rate through the rest of the year and into 2023, we are likely to see falls in housing values become more widespread as mortgage rates trend higher,” Mr Lawless said.

However, there are a number of mitigating factors that will help support housing including a tightening labour market that is putting upward pressure on rents, the return of international migration, as well as the fact that mortgage stress should also be minimised to some extent by mortgage serviceability assessments according to Mr Lawless.