What are the signs that a property market has peaked?

The Sydney and Melbourne housing market may have peaked or could be set to peak by spring, bank economists say, even as prices in other cities keep rising.

The largest capitals are showing signs of a slowdown, although prices remain elevated after low interest rates fuelled a pandemic property boom.

Although a healthy number of homes are still selling at auction, buyers are less willing to keep paying more and more, and a handful of indicators show momentum stalling, including slowing demand for loans, reduced buyer budgets, affordability barriers and worsening sentiment.

So, what are the signs of a market peak?

Home value growth slows

Sydney home values edged down 0.1 per cent in February while Melbourne values were flat, CoreLogic figures released on Tuesday show, although Brisbane rose 1.8 per cent and Adelaide 1.5 per cent.

It was Sydney’s first monthly fall in 17 months, while Melbourne edged down in December and ticked up in January.

Commonwealth Bank head of Australian economics Gareth Aird said dwelling prices have likely peaked in the two largest capitals.

“The context of what’s happened last year with this phenomenon of surging prices meant prices had to top out,” he said.

“With talk about rates rising, and the Reserve Bank raising interest rates, that’s going to affect what people are willing to pay for a home.”

Interest rates rise

Banks have been lifting fixed mortgage rates for months, even though the Reserve Bank has not yet raised the cash rate.

Potential buyers facing the prospect of higher monthly mortgage repayments may choose not to borrow as much, or may not be able to borrow as much, and instead compromise on the type of property or suburb they hoped for.

“Fixed rates have been increasing for about nine months,” AMP Capital chief economist Shane Oliver said.

“So you could tick off – we’ve seen a deterioration in affordability that squeezes out more buyers, and we’ve seen a move towards higher interest rates in fixed rates.”

Once the cash rate rises, likely later this year or next year, several economists expect reduced buyer budgets could push property prices lower.

Dr Oliver said Sydney prices could already be at their peak, or they might bounce back this month, but either way, the two largest cities are at least approaching peak prices.

Home buyer sentiment weakens

A closely watched indicator of home buyer sentiment has worsened, Westpac senior economist Matthew Hassan said.

The Westpac-Melbourne Institute Index of Consumer Sentiment asks whether it’s a good time to buy a dwelling, offering an insight into owner-occupiers’ thoughts on affordability.

“It turned down pretty sharply over the last year and albeit from quite a high starting point,” Mr Hassan said. “It’s pointing to a downturn over the next six months or so.”

He added that investor demand is starting to show more strength than owner-occupiers.

Home loan approvals stall

When a property market is peaking, economists would expect demand for home loans to fall, as fewer people are trying to buy property.

New loan commitments were falling last winter during the Delta lockdowns, but have bounced back since November and hit a record high in January, ABS figures show.

This could suggest demand will hold up for a while longer, although investor loans grew more strongly than owner-occupiers, who have been the driver of the most recent property boom.

“There’s now clearer signs the owner-occupier upswing is starting to peak,” Mr Hassan said. “There are some tentative signs we’re topping out.”

Last year the banking regulator trimmed the maximum amount buyers could borrow by instructing lenders to make sure borrowers could repay their loans if interest rates rose 3 percentage points. The previous guide was 2.5 percentage points. This has cut some buyers’ budgets by about 5 to 10 per cent.

Auction clearance rates dip

When a property market peaks, auction clearance rates would usually fall as a smaller proportion of homes listed for auction find buyers.

Clearance rates in Sydney and Melbourne have slipped from their highs last autumn but are still in positive territory and not yet signalling price declines.

Auction clearances rates

Auction clearances rates have slipped but are still positive.CREDIT:MEREDITH O’SHEA 

Last weekend Sydney had a preliminary clearance rate of 76.3 per cent and Melbourne had 67.2 per cent.

A clearance rate of 70 per cent usually points to annual price growth of about 10 per cent, while the rate needs to fall below 60 per cent to be considered a buyer’s market.

But there are signs that sellers are more willing to accept prior offers, a suggestion they do not expect strong competition on auction day, and a few are reducing their reserve prices to secure a sale under the hammer.

“Auction clearance rates that high are normally consistent with prices still rising, but I think what might be happening is a lot of sellers suspect that we’re at the peak of the market and therefore they’re just happy to transact and sell with whatever the auction result ends up on,” Mr Aird said.

“Normally that’s a good indicator, but right now it might be sending a false signal.”

Government incentives wind back

Some of the first home buyer support introduced when the pandemic hit has wound up and demand from first home buyers has fallen.

The HomeBuilder program set up to support construction jobs through the early days of the pandemic has come to an end.

The federal First Home Loan Deposit Scheme is still running and state governments are still offering stamp duty concessions for entry-level properties, although these become harder to obtain as prices rise.

Affordability worsens

Property prices have soared and many buyers can only afford to pay so much, which is a handbrake on further price growth.

Over 2021, Sydney house prices jumped 33.1 per cent and units 8.3 per cent, while Melbourne houses rose 18.6 per cent and units 6 per cent, Domain figures show.

Dr Oliver said a market peak is usually preceded by a period of declining rates of price growth as the gains slow down – they rarely surge and then come to a stop.

“Invariably it’s preceded by a worsening in affordability,” he said.

Correction looms

Once interest rates rise, economists expect housing prices to fall, but the peak is unlikely to be sharp or uniform.

“Over the longer run the more usual cycle for dwelling prices is to have a steep rise followed by a long period of flat, perhaps slightly declining prices,” Mr Hassan said.

“It’s more usual to reach a new plateau and have a period of relative stability. It’s not a pendulum that we swing automatically into a correction phase.”

Westpac forecasts dwelling prices to fall 7 per cent next year and 5 per cent the year after, while CBA forecasts an orderly correction of 8 per cent in 2023, and ANZ tips a 6 per cent fall in 2023, all modest falls in the context of the recent gains, meaning housing is likely to remain expensive relative to incomes.

Smaller capitals could also keep rising for longer as Sydney and Melbourne top out. And expect to see the most sought-after homes still attracting hot competition at auction, while properties with flaws take longer to find a buyer.

Mr Aird said price falls can gather a little momentum of their own.

“Once buyers expect prices to come down, they invariably come down, because buyers tend to hold off in expectation that prices go lower, and then they go lower,” he said.


Article Source: www.brisbanetimes.com.au