Sydney’s median property value has been falling since January 2022. According to CoreLogic, it has slipped 7.4% over the past seven months, reversing some of its gains from last year.
How does the market today compare to the last downturn? Is there anything we can learn from it about the future and when conditions will change?
When was the last time Sydney’s property market slumped?
In the wake of the COVID-19 pandemic, Sydney property prices went down slightly, but not significantly. By the end of 2020, property prices had risen above their pre-pandemic levels, with the market rebounding in the September quarter of that year.
In fact, the last real Sydney market downturn took place between 2017 and 2019, when the median Sydney property value fell by around 15%.
What happened then?
There have been so many changes since COVID struck that five years ago seems like ancient history. However, if you think back to 2017, the banks were under scrutiny and a Royal Commission into Banking was being established.
Before then, the nation’s property market had been booming. After growing 34.7% between 2011 and 2015, Australia’s capital cities’ median value grew by 14.8% between 2015 and 2017. Between those two booms, we had a small market loss of -0.1%, but overall, we had almost a decade of growth.
The banks had become too lax with their lending, however, contributing to the rise in property prices. Later, the Royal Commission would expose some of these lending practices, including fake applications and insufficient checks. As early as December 2017, APRA clamped down on interest-only loans, and the banks followed suit by self-regulating to tighten their rules.
As a result, many people were unable to borrow as much and their borrowing capacities plummeted by around 20%.
Property prices are affected immediately
It has been argued that people’s ability to borrow is an important factor in determining property values. Banks reducing their lending capacity will obviously impact on what people are able to spend.
A prospective buyer may only offer $1.8 million on a home rather than $2 million. In such a situation, competition is reduced – especially when other buyers are in a similar position and prices will automatically decline.
How did the last property bubble end?
APRA relaxed its interest-only requirements and the banks also started to ease their lending restrictions. At the same time, a range of new alternative lenders entered the home loan market, increasing competition and making it easier for some to borrow.
Then the RBA gave the market a helping hand by cutting interest rates after a prolonged period of stability. The official cash rate fell from 1.50% to 1.25% in June 2019, then to 1.0% in July and on to 0.75% in October. At the time, it was as low as interest rates had ever been.
These cuts coincided with the Morrison Government’s election win (at a time when there had been uncertainty because the Shorten-led Labor Party were pledged to end negative gearing), and suddenly the market was alive again. In fact, the rebound from the 2017-2019 market slump was one of the quickest we’ve seen, with prices rising 4.8% in the September 2019 quarter and another 4.7% in the December 2019 quarter.
Sydney’s median price lifted another 3.2% in the first two months of 2020 – the median price rising 12.7% in just eight months. Then, COVID hit hard.
How does today compare?
Like 2017, 2022’s declines are partly the result of a reduction in buyers’ borrowing capacity. This time, however, instead of banks tightening criteria, they are forced to increase home loan interest rates, following the RBA’s raising of the official cash rate. Already, after five consecutive rises, the official rate stands at 2.35%, up from just 0.1% earlier this year. And the RBA tells us to expect more rises until it gets inflation under control.
The RBA’s rate rises come at a time when the cost of living is also rising. Inflation is now 6.1%, its highest level since 1990 (the RBA’s official cash rate topped out at 17.5% in January that year, the highest rate ever). And, with Russia’s invasion of Ukraine putting pressure on oil and gas prices, Australians seemingly have less money to spend than they have done for some time – all of which could have a depressing effect on house prices.
So when will we get out of the current market?
Sydney’s housing market has a history of prolonged upswings followed by short, sharp declines, despite today’s ominous economic conditions.
Based on Domain’s own analysis of 30 years of Australian property data, upswings lasted an average of 33 months, and prices rose by 32.7%. Conversely, downswings lasted an average of nine months, and prices fell by 3.3%.
It is interesting to note that price increases nationwide total 33.6% during the Pandemic boom, which lasted 21 months. But, when viewed alongside 2019’s gains, its duration was actually close to average. As a result, we hope that the current downturn won’t last too long.
Optimism is also based on other factors. New jobs are being created at a record pace in the economy. We are also close to a record low unemployment rate of just 3.5%. At the same time, our balance of trade (or how much we export overseas) is at an all-time high; and wages are finally rising.
In short…
While the 2017-2019 downswing and today’s lower prices share many similarities, they also have some differences. It is important to remember that declining markets always come to an end.
Even though the near term may seem challenging, Sydney property prices have always trended upwards over the long term.