Property prices are continuing to soften with both Sydney and Melbourne leading the falls across the country.

According to the latest data from CoreLogic, national property values fell 1.3% in July, with Sydney down 2.2% and Melbourne's values dropping by 1.5%.

The previously rampant Brisbane market also dipped into negative territory for the first time in nearly two years, falling -0.8%, while Canberra (-1.1%) and Hobart (-1.5%) were also down over the month.

Perth's growth in values has seen a sharp reduction, but it still managed to achieve a small 0.2% gain, while Adelaide (+0.4%) and Darwin (+0.5%) also showed positive growth.

Source: CoreLogic

CoreLogic's Research Director, Tim Lawless, said rising interest rates are likely to cause price to continue to soften.

"The rate of growth in housing values was slowing well before interest rates started to rise, however, it's abundantly clear markets have weakened quite sharply since the first rate rise on May 5," Mr Lawless said.

"Although the housing market is only three months into a decline, the national Home Value Index shows that the rate of decline is comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s."

"In Sydney, where the downturn has been particularly accelerated, we are seeing the sharpest value falls in almost 40 years."

Regional markets have also weakened, with the combined regional index recording the first monthly decline (-0.8%) since August 2020. Dwelling values were down across Regional New South Wales (-1.1%), Regional Victoria (-0.7%), Regional Queensland (-0.7%) and Regional Tasmania (-0.6%), while values continued to trend higher in Regional SA (1.1%) and Regional WA (0.1%).

Overall, regional markets are still outperforming their capital city counterparts, but this month's figures show major regional centres are not immune to falling home values.

"Dwelling values across CoreLogic's combined regionals index were up 41.1% from the pandemic trough to the June peak, compared with a 25.5% rise across the combined capitals index," Mr Lawless said.

"The stronger growth reflects a significant demographic shift towards commutable regional markets, which is likely to have some permanency as more workers take advantage of formalised hybrid employment arrangements."

Most of the regional centres adjacent to Sydney, Melbourne and Brisbane (including Geelong, Ballarat, Illawarra, Newcastle and Lake Macquarie, the Southern Highlands & Shoalhaven, the Gold Coast and Sunshine Coast) recorded a decline in home values over the three months to July, marking the end of nearly two years of significant capital gains.

After seeing a slower rate of growth during the past few years, unit values are now holding up strongly compared to houses, with values down -1.0% compared to -1.5% for houses.

"This trend is most apparent across the three largest capitals as well as Canberra, where housing affordability challenges may be deflecting more demand towards the medium to high density sector," Mr Lawless said.

"Additionally, firmer interest from investors should favour the unit market over houses where demand has historically been more concentrated."

Listings on the Rise

Listings continue to trend higher across much of the country, however, there is a growing divergence between the major capital cities and the smaller locations.

In Sydney and Melbourne, total listings are already 8 to 10% above five-year averages, however Brisbane, Adelaide and Perth are recording advertised supply levels that are more than -30% below the five-year average, suggesting a faster absorption through the growth cycle to-date.

Notably, CoreLogic's estimate of sales activity over the three months to July was -16% lower relative to the same period in 2021.

The national figures are heavily impacted by an estimated -39.8% drop in sales across Sydney and a -26.3% fall in Melbourne sales, relative to the same period a year ago. Stronger markets such as Adelaide and Perth have recorded a rise in activity, with the estimated volume of sales up 21.6% and 7.2% respectively.

"It's important to remember the context of these statistics," Mr Lawless said.

"While national home sales are falling from record highs, they are still 9.2% above the previous five-year average for this time of year.

"There is a good chance the number of properties sold in the second half of this year and into 2023 will continue to trend lower as higher interest rates, a more cautious lending environment and a reduction in household confidence continues to weigh on housing demand."

Source: CoreLogic

Rents Still Pushing Higher

Rents continued to trend higher through July, rising 0.9% nationally over the month to be 2.8% higher over the rolling quarter and 9.8% higher over the past 12 months.

The trend in rising rents is evident across each of the capital city and broad rest of state markets, led by Brisbane with a 4.2% rental rise over the three months to July, to a 0.3% rise across regional NT.

Mr Lawless said rental markets are extremely tight, with vacancy rates around 1% or lower across many parts of Australia.

"The number of rental listings available nationally has dropped by a third compared to the five-year average, with no signs of a lift in rental supply," he said.

“On top of already tight rental supply, it’s likely demand will continue to increase as overseas arrival numbers climb."

“Such widespread and rapid rental growth is likely to remain one of the key domestic factors pushing up inflation, along with construction, food, transport and energy costs.”

While some of these can be attributed to global supply chain issues, the rental situation is a domestic one, caused by a combination of tight supply and amplified demand, according to Mr Lawless.

“Logically, we will probably see a reversal of the pandemic trend towards smaller rental households as tenants look to maximise their occupancy and spread rental costs across a larger household.

“To this end, rental values are rising fastest in the more affordable unit sector as tenants seek out cheaper rental options.”

Source: CoreLogic

Looking Forward

The outlook for national property markets remains uncertain as the RBA continues to move forward with higher interest rates to combat inflation.

“As borrowing power is eroded by higher interest rates, and rising household expenses due to inflation, it’s reasonable to expect a further loss of momentum in housing demand,” Mr Lawless said.

Mr Lawless said this interest rate hiking cycle may be short and sharp, with financial markets and some economic forecasters now factoring in interest rate cuts through the second half of next year.

“When interest rates start to stabilise, or potentially reduce next year, this could be the cue for housing values to find a floor,” he said.

“Similar to the trajectory of the upswing, this downswing phase could be a short but sharp one, depending on how high and fast interest rate settings go.”

The spring selling season will test the depth of housing demand where historically the flow of new listings has surged through spring and early summer, typically reaching a peak in late November Mr Lawless said.

“The rise in freshly advertised stock may not be met with a commensurate lift in buyer demand, resulting in higher levels of housing inventory.

“By late spring or early summer, we could be seeing advertised stock levels trend higher than normal,” he said.

“Vendors are likely to be more competitive across a smaller pool of active buyers, which would drive clearance rates lower across auction markets, and could result in longer selling times and larger discounting rates for private treaty sales.”