Australia’s property market bull run may be on its last legs

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December 02 2021
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Experts say that the runaway growth of Australia’s housing market is coming to an end.

Australia’s property market bull run may be on its last legs

The unique conditions that created Australia’s latest property surge might be on their last legs.

AMP chief economist Shane Oliver said that Australia’s property market is heading for a slowdown in 2022, with a further contraction expected in 2023.

“While the surge in prices has been big, the puff is coming out of the property market,” he said.

While housing prices are on track to grow 22 per cent in 2021, Mr Oliver expects to see just 5 per cent price growth in 2022.

In 2023, he predicted that housing prices would begin to fall from this peak by between 5 per cent and 10 per cent.

Mr Oliver suggested that there are five major reasons to expect a slowdown in the property sector over the next 12 months.

To begin with, there’s the worsening of affordability.

“While interest rates are still low the surge in house prices relative to wages has gone hand in hand with a surge in the level of debt relative to incomes,” he said.

Mr Oliver said that this is squeezing not just first home buyers out of the market but also existing owners looking to trade up. He added that the prevalence of this issue within Sydney and Melbourne might explain their relative slowness compared to other Australian cities.

Another key factor likely to drive price growth in Australia’s housing market downward in 2022 is a rise in supply.

Mr Oliver forecast that the end of lockdowns and high prices would put an end to the chronically low level of listings seen over the past 18 months.

“We may at last be heading into a period of housing oversupply after years of undersupply,” he suggested.

Then, there’s the elephant in the room: rising interest rates.

Mr Oliver noted that fixed mortgage rates are already on the rise, and the RBA is expected to raise the cash rate from late next year.

“Fixed mortgages have accounted for 50 per cent or so of new loans recently, so are far more significant than they used to be in impacting new buyer demand,” he noted.

Additional macro-prudential tightening is also expected to play a part in cooling potential price growth in the property sector.

Last month, the Australian Prudential Regulation Authority increased the loan serviceability buffer from 2.5 per cent to 3 per cent in response to concerns around overall household debts.

The regulator also issued an edict for banks to hold more capital for higher risk loans.

“The former will reduce the amount borrowers can borrow and the latter will raise the interest rate on or reduce the supply of higher risk loans,” Mr Oliver explained, adding that further tightening measures are entirely possible.

He said that all of the above factors are likely to be aided by a broader shift in consumer spending.

New variants like Omicron permitting, Mr Oliver expects that increased consumer spending on services will serve to reduce overall housing demand.

Ultimately, Mr Oliver warned that Australia’s 25-year bull market for property prices might be nearing its end.

“This tailwind for property prices that’s enabled people to keep borrowing more to pay more for houses is likely over,” he said.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

About the author

Fergus is a journalist for Momentum Media's nestegg and Smart Property Investment. He likes to write about money, markets, how innovation is changing the financial landscape and how younger consumers can achieve their goals in unpredictable times.

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