House price growth is continuing to ease after a record run, led by the larger capital cities of Sydney and Melbourne.

Nationally the CoreLogic Home Price Index shows home prices increased 0.6 per cent last month, the smallest increase since October 2020.

Values in Sydney fell -0.2 per cent in April while Hobart also saw a fall of -0.3 per cent, with prices in Melbourne remaining flat.

The smaller capital cities of Adelaide, Brisbane and Canberra all saw continued strong price growth with values up 1.9 per cent, 1.7 per cent and 1.3 per cent respectively.

In the past 12 months, home prices across the country are now 16.7 per cent higher, with regional areas outperforming, up 23.9 per cent.

Source: CoreLogic

CoreLogic’s Research Director Tim Lawless said the weakening state of the market has taken the rolling quarterly trend into negative territory across Sydney and Melbourne for the first time since these cities were in the midst of extended lockdowns in mid-to-late 2020.

Mr Lawless said that while the smaller cities are currently still experiencing price appreciation, they too will likely see slowing growth in prices as higher interest rates take their toll.

“With the RBA cash rate set to rise, we are likely to see a further loss of momentum in housing conditions over the remainder of the year and into 2023,” Mr Lawless said.

“Stretched housing affordability, higher fixed term mortgage rates, a rise in listing numbers across some cities and lower consumer sentiment have been weighing on housing conditions over the past year.

“As the cash rate rises, variable mortgage rates will also trend higher, reducing borrowing capacity and impacting borrower serviceability assessments.”

One of the main factors that continue to boost prices in the smaller capital cities and regional areas is the lack of listings.

Advertised inventory, at a national level, is tracking almost 30 per cent below the previous five-year average. Total advertised inventory is more than 20 per cent below levels from a year ago in Brisbane and Adelaide, and around 40 per cent lower than the previous five-year average in both cities.

In weaker markets like Melbourne and Sydney, advertised supply levels have normalised. Sydney advertised stock levels are roughly in line with the previous five year average, while listings in Melbourne were 8.2 per cent higher. Higher stock levels across these markets can be explained by an above average flow of new listings coming on the market in combination with a drop in buyer demand.

In Hobart, where April’s -0.3 per cent decline follows 22 consecutive months of growth, stock levels started to increase in the middle of March.

The new listing count is now 46 per cent higher over the four weeks to April 24 compared to the same period in 2021.

“With higher inventory levels and less competition, buyers are gradually moving back into the driver’s seat. That means more time to deliberate on their purchase decisions and negotiate on price,” Mr Lawless said.

Source: CoreLogic

 Rental markets are also showing multi-speed conditions, with most of the capital cities experiencing an upward trend in rental growth in 2022. Based on the annual change, house rents (+9.1 per cent) are rising faster than unit rents (+8.7 per cent), however this trend is changing sharply as demand for unit rentals increases.

“On a rolling quarterly basis, we are now seeing unit rents rising faster than house rents especially in Sydney and Melbourne where rental conditions across the unit sector were previously much softer,” Mr Lawless said.

“The shift in rental demand towards units reflects both rental affordability pressures, which are deflecting more demand towards the ‘cheaper’ unit sector, and the return of overseas migrants and visitors.

“Rental demand from overseas arrivals tends to skew towards inner city and higher density precincts.”

According to Mr Lawless, housing market conditions have been easing since moving through a peak rate of growth in March last year.

This slowing of growth coincided with rising fixed-term mortgage rates, as well housing affordability progressively becoming more of a challenge, consumer sentiment trending lower and, from October last year, tighter serviceability testing for borrowers.

Mr Lawless said higher interest rates will slow housing markets around the country.

“Although we are expecting the housing market to move into a downturn through the second half of the year, it is important to remember the context of the recent growth phase,” he said.

“Since the onset of the pandemic, national housing values have increased by 26.2 per cent, adding approximately $155,380 to the median value of an Australian dwelling.”

CoreLogic believes the outlook for the housing market will depend on how aggressively the RBA raising interest rates, with the expectation being that a 2 per cent increase in the OCR could weaken home prices by 15 per cent.