Housing values across the country have moved lower for the first time since September 2020, as declines in the largest capital cities offset continued growth in regional Australia.
CoreLogic’s Home Value Index for May found that dwelling values had fallen 0.1 per cent nationally and 0.3 per cent in the combined capital cities while the combined regional areas recorded growth of 0.5 per cent.
Prices in Sydney moved 1.0 per cent lower during the month to be 1.5 per cent below the peak reached in January, but they still remain 22.7 per cent above pre-COVID levels.
Melbourne posted the second biggest decline of 0.7 per cent among the capital cities, 0.8 per cent below its peak and only 9.8 per cent higher than before the pandemic.
“There’s been significant speculation around the impact of rising interest rates on the property market and last month’s increase to the cash rate is only one factor causing growth in housing prices to slow or reverse,” commented CoreLogic research director Tim Lawless.
“It is important to remember housing market conditions have been weakening over the past year, at least at a macro level.”
Canberra was the only other capital city to suffer a decline in May with a fall of 0.1 per cent, breaking a streak of growth that has continued since July 2019. Dwelling values in the nation’s capital currently sit 37.9 per cent above pre-pandemic levels.
Elsewhere, prices lifted 1.8 per cent in Adelaide, 0.8 per cent in Brisbane, 0.6 per cent in Perth, 0.5 per cent in Darwin and 0.3 per cent in Hobart.
Nationally, the quarterly rate of growth was 1.1 per cent in May, after reaching a peak a year earlier.
“Since then, housing has been getting more unaffordable, households have become increasingly sensitive to higher interest rates as debt levels increased, savings have reduced and lending conditions have tightened,” said Mr Lawless.
“Now we are also seeing high inflation and a higher cost of debt flowing through to less housing demand.”
On an annual basis, prices in the combined capital cities increased by 11.7 per cent as of May, down from the peak annual growth of 21.3 per cent recorded in January.
Regional areas have fared significantly better with annual growth of 22.1 per cent last month, but this was also below the peak of 26.1 per cent seen in January.
“Considering we are already seeing the pace of growth easing across most regional markets, it is likely we will see growth conditions softening in line with higher interest rates and worsening affordability pressures,” Mr Lawless warned.
“Arguably, some regional markets will be somewhat insulated from a material downturn in housing values due to an ongoing imbalance between supply and demand as we continue to see advertised stock levels remain extraordinarily low across regional Australia.”
Commenting on the data, AMP Capital chief economist Dr Shane Oliver said that higher interest rates were the biggest factor in the housing market downturn.
“Being able to borrow at a fixed rate of 2 per cent or less was a key driver of the boom in prices with fixed rate lending accounting for 40 to 50 per cent of new lending about a year ago, compared to a norm of around 15 per cent,” he said.
“But with fixed mortgage rates roughly doubling over the last 12 months combined with an increase in the interest rate serviceability buffer from 2.5 per cent to 3 per cent, this has substantially reduced the amount new home buyers can borrow and hence their capacity to pay.”
Dr Oliver noted that the share of fixed rate home lending has now fallen back to about 15 per cent with variable rates continuing to rise alongside the cash rate.
“The net effect is a sharp dampening in home buyer demand,” he added.
AMP Capital has maintained its forecast of a peak to trough fall in house prices of between 10 and 15 per cent.
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.