Higher Rates and the Eastern Suburbs property market

Anyone waiting for lower interest rates will be waiting a while longer. On 29 September the Reserve Bank lifted the cash rate to 4.60 per cent. It was the fourth increase this year, and it takes borrowing costs to their highest point since 2011. Only a year ago, most of the conversation was about when the next cut would come.

Economist Warren Hogan, of EQ Economics, has argued for much of this year that heavy government spending is making the Reserve Bank’s job harder. The logic is simple. Public money supports jobs, wages, businesses and consumer spending — that is its purpose. But when there is already a great deal of money moving through the economy, more spending adds to demand at exactly the moment the Bank is trying to cool it.

Add a conflict in the Middle East pushing fuel prices higher, and underlying inflation has stayed stubbornly above target. That leaves interest rates to do most of the heavy lifting.

That is the economics. But there is another side to this story, and it is the one I see every week — property, household debt, and the extraordinary wealth Australians built when money was cheap.

Cheap money built a great deal of wealth

From late 2020 until mid-2022, the cash rate sat at 0.10 per cent. By any historical measure, money was almost free.

Borrowing capacity expanded, and Sydney values moved with it — across 2021 alone they rose by roughly a quarter. People who had bought for $800,000, $1 million or $1.5 million suddenly held something worth considerably more. Across the Eastern Suburbs, many owners became millionaires on paper simply by owning through one of the strongest cycles this country has seen.

But something else grew alongside the wealth.

Debt.

A large loan at a very low rate felt manageable, so households took on larger loans. Australians still owe close to $1.80 for every dollar of annual disposable income.

The debt did not shrink when rates rose. The cost of carrying it simply went up.

We are now on the other side of the cycle

Sydney values peaked in February. By the end of August they were 7.1 per cent lower — a faster fall than at the same point of the 2022–23 correction. The top end has moved first and furthest, with upper-quartile Sydney house values now more than 10 per cent below their peak.

And yet the market has not stopped.

Families grow. People separate. Children leave home. People relocate, investors rebalance, and older owners downsize. None of those decisions waits for the Reserve Bank. Property will continue to change hands.

What has changed is the psychology.

Buyers are more nervous. They take longer to decide. They calculate repayments carefully and question value. And they are acutely aware of what could happen if they buy before they sell.

A few years ago, “buy before you sell” was common advice. In a rising market, owners were confident their existing home would sell quickly and well. That confidence has gone, and the numbers explain why. Advertised stock across the capital cities is about 24 per cent higher than a year ago — yet fewer new listings are coming to market than usual. Stock is building not because more people are selling, but because homes are taking longer to sell.

Buyers and sellers now want certainty before they commit to another large debt. I think that is sensible.

Fear of missing out has become fear of overpaying

The real issue is not whether rates move by another quarter of a per cent. It is confidence.

When prices are rising quickly, buyers worry about missing out. When the market is uncertain, they worry about paying too much. Those are two completely different markets.

In a boom, buyers move quickly because they fear the next property will cost more. Today, many are prepared to wait. They know something else may come up. They know some sellers will become more negotiable. And they know borrowing is expensive.

That changes the entire selling process.

When prices are rising, buyers worry about missing out. When the market is uncertain, they worry about paying too much.

Auction is no longer the automatic answer

One of the changes I’m seeing is a gradual move away from sending every property to auction.

The numbers support it. In the week to 19 September, Sydney cleared 54 per cent of its auctions, against 78 per cent in the same week last year. Auction volumes have been running well below last year for weeks, as fewer owners choose to sell under the hammer.

Sydney auction clearance rate

The same week, a year apart

I am not against auctions. When five, six or ten genuine buyers want the same home, there is no better way to create urgency and competition. But an auction cannot manufacture buyers who do not exist.

In a more cautious market, the traditional way of selling matters again. The agent has to work the market.

That means knowing who the buyers are — which have already sold, which still need to sell, and which have finance approved. It means following people up, hearing what they really say about price, identifying their objections, and negotiating. Every day.

Listing a home online, running a four-week campaign and hoping several buyers turn up on auction day is not always enough.

An auction cannot manufacture buyers who do not exist.

The agent’s role is becoming more important

In a booming market, almost everything sells. Sometimes the market does most of the work.

In a changing market, experience matters. A good agent can tell a genuinely interested buyer from someone simply inspecting. They know when to press a negotiation and when to give a buyer room. They know when an offer is worth pursuing and when the market is likely to produce something better.

And sellers need honest information. A comparable sale from February may no longer reflect today’s market. Buyers are working out their repayments today. They are getting finance under today’s lending conditions. And they are comparing your home against everything else for sale today.

Quality will matter more — particularly here

A changing market widens the gap between good property and average property.

A well-positioned home in a tightly held street — with good light, parking, a sensible layout, a view or an outstanding position — can still draw several buyers. A compromised property may take considerably longer.

So sellers need to understand what they actually own, rather than relying on what the house next door achieved at the peak. And buyers should remember that a softer market does not make every property cheap. The best homes are usually the ones everyone still wants.

A return to fundamentals

To me, this market marks a return to traditional real estate.

Agents will have to prospect, communicate and negotiate. They will have to build real relationships with buyers rather than simply collecting registrations for auction day. Sellers will have to listen carefully to what the market is telling them. Buyers will increasingly negotiate on value rather than fear.

Rates may rise, fall or stay where they are. Government spending and inflation will keep shaping those decisions. But property isn’t going anywhere.

The market will not stop. It will simply become one where buyers are more careful, sellers need to be more realistic, and agents once again have to work harder to bring a sale together.