Fewer quality and well-located homes hitting the market as interest rates bite

Easing property prices and reduced competition for some homes are helping Melbourne buyers get more for their money as hikes in interest rates increasingly bite. But for prospective buyers, it’s a mistake to think there will be across-the-board price falls for all categories of property.

In fact, many astute buyers are now focusing their energy on entry-level properties. That’s because apartments priced below about $800,000 and houses below $1.3 million are among the best buy-in deals on offer.

But try and buy a larger family home or a downsizer-suited property in one of the city’s sought-after neighbourhoods and your chances of getting a bargain will be sharply reduced.

Why? Because the homeowners in sought-after locations typically have a great deal of equity in their properties. As a result, they’re far less likely than less experienced property owners or debt-burdened investors to face mortgage stress or conduct a fire sale.

The Reserve Bank of Australia has pushed up official interest rates by a total of 1.75 percentage points since early May. The most recent increase was a 0.50 per cent hike in the official cash rate in August.

Cameron Kusher, the Director of Economic Research at analyst group CoreLogic and realestate.com.au, says the cash rate is now expected to be in the 2.5-3 per cent range by the end of the year.

“Some buyers might wait for prices to reduce, however, higher interest rates can also reduce people’s borrowing capacity,” Mr Kusher says.

“Although price growth was already slowing pre-rate hikes, the RBA’s moves have further slowed price growth and resulted in some falls over recent months. National property prices have fallen -0.5 per cent from their peak in March 2022, with larger falls in Sydney and Melbourne, and similar or smaller falls in Brisbane, Darwin, and Canberra. Even in the cities where prices are still rising, the rate of growth has slowed significantly.”

But market participants should not lose sight of the enormous amount of house price growth experienced since the Covid19 pandemic first started to influence Australian society and property transactions in early 2020.

CoreLogic data shows that property prices nationally increased by 35.1 per cent since the start of the pandemic in March 2020 to March 2022. From their peak in March of this year, prices have now fallen by -0.5 per cent to June 2022.​

​With official interest rates expected to rise much higher over the coming months, Mr Kusher expects that price falls will continue. However, the projected falls are very unlikely to put a large dampener on the 35 per cent growth that most property holders have experienced since 2020.

“Prices have already slipped lower than their recent peaks in Sydney (-1.5 per cent), Melbourne (-1.8 per cent) and Brisbane (-0.1 per cent),” Mr Kusher notes.

“The recent run-up in prices, coupled with reducing borrowing capacities as interest rates rise, is likely to see price falls broaden and then accelerate further into 2023, with the more expensive cities expected to record the largest price falls.
Nationally, we are forecasting prices to fall by between -2 per cent and -5 per cent by the end of this year and by a further -7 per cent to -10 per cent by the end of next year.​

“The fact that interest rates began to rise much sooner than expected has been the main driver in the shift of our forecasts produced in January of this year. We are expecting further interest rate rises over the coming months, which we anticipate will push prices lower.​” But Mr Kusher also stresses that: “Those that own homes have seen a significant and rapid increase in equity.​”

So, what will be the wash-up for buyers and sellers?

In the real estate landscape, most buyers are sellers and most sellers also intend to buy something new. Just about everyone engaged in property transactions is aware that the real estate process is cyclical. For many, this means that you shouldn’t stay out of the market when you’re ready to go into it because you’ll probably find an opportunity to purchase that may be difficult to repeat.

The conditions seen over the past two years have been widely described as a sellers’ market. Supply was short and there was high demand, with buyers competing hard for the available properties and pushing up prices.

But in the second half of 2022 conditions have shifted towards a buyers’ market. Still, it is a highly fragmented buyers’ market, depending on the area and the quality of the property being sought.

Nelson Alexander’s extensive database of prospective buyers shows that there is still a shortage of stock on the market and that A-grade properties are attracting robust competition.

And the harsh fact is that there are fewer quality homes for sale than six months ago.

When there are news reports of prices declining it can cause vendors to lose motivation and wait for things to change.

It’s expected that more homes will be listed for sale later this year and early next, once homeowners accept that they can still buy and sell at a good price.

But homeowners with a lot of equity in their properties are most unlikely to accept low-ball offers. As with previous cyclical downturns, some owners are likely to simply pull up stumps and refuse to list well-located properties.

Mr Kusher says that sales volumes have already eased–“Looking at the sales of properties that were listed on realestate.com.au, there have been 15.3 per cent fewer sales over the first six months of this year compared to the same period in 2021,” he says.

“Preliminary sales volumes started the year slightly stronger than they did last year but have been consistently lower since March, with the gap between sales volumes this year and last year widening over recent months.”​

To buy the right property at the right price in today’s market, you will need to tap into the negotiation skills of an experienced agent. With the banks lifting interest rates, Nelson Alexander is encouraging clients to speak to a range of lenders and to make sure they have the best rate available.

People who are looking to upgrade their home should get on the front foot and contact their local Nelson Alexander agent.

It is more important than ever to establish a rapport with your agent around what your criteria and motivation as the pipeline of new and quality stock is looking a lot slimmer than it was in the period between 2020 and early 2022.

If you are thinking of buying or selling in the current market, please contact any Nelson Alexander office.