Property market update: Sydney, June 2022

For comparison, Sydney ended the 2021 financial year with a bang by posting a lofty 2.6 per cent monthly gain in dwelling values, which brought property prices in the city to new record highs.

This is a stark difference from the scenario this year, as the city closed out the 2022 financial year in the red.

And while the Australian market is no stranger to declining values after going through market cycles in the past, CoreLogic research director Tim Lawless noted that the decline is steeper than previous downturns.

“We’re seeing the rate of decline in housing values gathering, very clear momentum,” Mr Lawless said. He also highlighted that the downward trajectory is already much sharper than the tapering of growth observed in 2017.

“Housing value growth has been easing since moving through a peak in March last year when early drivers of the slowdown included rising fixed-term mortgage rates, an expiry of fiscal support, a trend towards lower consumer sentiment, affordability challenges and tighter credit conditions,” the expert explained.

Mr Lawless noted that surging inflation — which has also triggered the Reserve Bank of Australia (RBA) to start its monetary policy tightening — has added further momentum to the downwards trend.

“Since the initial cash rate hike on May 5, most housing markets around the country have seen a sharper reduction in the rate of growth,” he said.

From May to June, the country’s official cash rate has risen from a record low of 0.35 per cent to 0.85 per cent as the regulator stepped in to control inflation.

As of writing, the official cash rate currently stands at 1.35 per cent following a 50-basis point hike by the central bank during its July board meeting.

According to Mr Lawless, market players should not expect the rate hikes to end any time soon.

“Considering inflation is likely to remain stubbornly high for some time, and interest rates are expected to rise substantially in response, it’s likely the rate of decline in housing values will continue to gather steam and become more widespread,” he forecast.

On that note, what’s in store for the NSW capital at the start of the new financial year? For now, let’s take a closer look at how Sydney performed in June 2022.

Property values

Data from CoreLogic revealed that Sydney posted a 1.6 per cent decline in dwelling values in June, further weakening from the 1 per cent fall recorded in May.

As a further indication that the city’s downturn is building momentum, the city’s property values were down by 1.4 per cent in the last three months — a further decline from the 0.5 per cent decline recorded in the previous quarter.

Over the year, the median value of dwellings in Sydney is now just up by 5.9 per cent — almost half of the 10.3 per cent annual growth rate seen in April.

While Sydney defended its title as the most expensive city in the country to buy a property, the average cost of a dwelling in the harbour city fell by $10,176 over the month to $1,110,660.

The city’s housing market also continued to lose steam in June, with the sector posting a 1.8 per cent decline over the month.

The figures are a further decline from the 1 per cent drop recorded over May and mark the fourth consecutive month of falls for the sector this year.

Compared to June 2021, median house prices are up by 6.8 per cent, bringing the average value of a Sydney house to $1,403,964. Month on month, the median price has declined by more than $21,000.

The city’s unit sector also dragged its feet in June, tallying a 1 per cent drop in values over the period. The figures indicate a continuation of the 0.7 per cent decline recorded in May.

On an annual basis, units are up by 3.2 per cent, with the median price for apartments falling by more than $8,400 over the month to currently stand at $$821,150.

According to Mr Lawless, unit markets are holding their value a little better than houses across the largest capitals amid the downturn.

“Since the onset of the pandemic in March 2020, capital city unit values have risen 9.8 per cent compared to 24.7 per cent for houses, resulting in better affordability across the medium to high density sector,” the expert noted.

In Sydney, houses recorded a 3 per cent drop in average values through the June quarter, a steeper decline compared with a 2.1 per cent fall in unit values over the same period.

Melbourne also showed a smaller quarterly decline in units relative to houses at -0.5 per cent and -2.4 per cent, respectively.

“The stronger performance across the unit sector comes after house values consistently outperformed units through the upswing,” Mr Lawless said.

Supply and demand

CoreLogic noted that as housing conditions slow, the market is swinging back in favour of buyers.

The property data provider’s report highlighted that the supply and demand in each city continued to be a strong indicator of the future growth trajectory of markets.

For Mr Lawless, Melbourne and Sydney were now “absolutely buyers’ markets”.

“Buyers are in the driver’s seat. Stock levels are above average levels,” he stated.

Data showed Sydney and Melbourne (where housing conditions are the weakest) continued to be outliers among capital markets in terms of supply.

While national advertised stock levels remain -7.4 per cent lower relative to 2021, in Sydney and Melbourne, the total advertised supply is now 7 to 8 per cent above the levels recorded a year ago and well above the five-year average.

Mr Lawless said the rise in advertised supply in the two biggest cities is mostly caused by a slowdown in the rate of absorption.

“Estimated transactions in Sydney throughout the June quarter were -36.7 per cent lower than a year ago while Melbourne is down -18.3 per cent,” Mr Lawless stated.

He also noted that in conjunction with the decline in turnover volumes, the flow of new listings added to the market is falling as selling conditions become more challenging and listings move into a seasonal lull.

“We aren’t seeing any signs of panicked selling as housing conditions cool, in fact, the trend is the opposite, with the flow of new listings to the market slowing,” he stated.

In another sign of weakening demand, local agents are reporting that properties in Sydney and Melbourne are spending longer on the market and clearance rates are declining.

Data revealed that during one of the high points of the property frenzy, particularly in October 2021, Sydney’s houses only lasted 20 days on the market. However, figures showed that the average days on the market before a property sells has now risen to 29 days.

Speaking on the average days on the market of properties in the city, Mr Lawless said: “It’s a fairly gradual trend upwards, but it’s also a very clear trend.”

“As homes take longer to sell, you see discounting rates start to become larger as vendors need to negotiate more. That will also be reflected in lower auction clearance rates as well,” he forecast.

Auction markets

In a further indication that Sydney’s market correction has lurched another notch lower, data showed that fewer homes listed for auction in Sydney found new owners over June.

Data from Domain showed that Sydney’s clearance rate dropped for the fourth month in a row to 52.1 per cent in June. The figures are 1.2 per cent lower than in May and 19.6 per cent down from the same period last year.

Domain noted that the city hadn’t seen a clearance rate this low since the COVID-induced hiatus in April 2020. It added that outside of a pandemic-impacted month, it is the weakest outcome since April 2019.

Data also showed that Sydney recorded the greatest proportion of sold prior and withdrawn auctions of all the capitals.

Out of the 3,328 scheduled auctions in the city, data showed that 25.7 per cent were sold prior to being on the slate, while 25.1 per cent didn’t even get to the auction stage.

Domain chief of research and economics Dr Nicola Powell said this figure in Sydney demonstrated “that market jitters are swaying sellers to secure a deal before auction day or swap tactics”.

She explained that there is a trio of forces contributing to the market’s deceleration.

“Weakening auction conditions are now evident in all capital cities, with both monthly and annual falls in clearance rates aligning to the overall housing market slowdown, excluding Perth and Darwin,” she said in the report.

She further expounded that as interest rates continue their upward trajectory, supply rises and affordability constraints limit buyers, there will be an “ongoing run of softening clearance rates, auction volumes and auction prices as well as a change in seller price expectations and the availability of stock for buyers”.

Domain’s latest monthly report also showed that the city’s house and unit sectors recorded clearance rates of 52.6 per cent and 50.7 per cent, respectively. The figures indicate that both sectors recorded a 1.2 per cent decline in clearance rates over the month.

Despite the declining clearance rates, Sydney was one of the two cities (aside from Canberra) to record an increase in the auction house price over the month.

The median auction price for houses in the city rose by 0.1 per cent over the month to $1,802,500. Over the year, the figures are up 8.7 per cent. The marginal increase followed three consecutive months of decline.

Meanwhile, unit auction prices in the city fell by 3.2 per cent to $1,065,000. Compared to the same period last year, the figures are down by 1 per cent.

Separate data from CoreLogic mirrored Domain’s results. According to CoreLogic, 2,343 properties went under the hammer in the city, with a final average clearance rate of 53.4 per cent.

The monthly average is down from the 56.7 per cent clearance rate recorded in May out of 3,501 auctions.

If you want to be in the loop about what’s happening across auction markets in the country, follow our weekly updates in our News section.

Vacancy rates

June did not bring a reprieve for the people looking for a rental space in Sydney, as the city’s vacancy rate remained at its lowest level since Domain records began.

Data showed that the harbour city’s vacancy rate stood unchanged over the month at 1.4 per cent, firmly solidifying its status as a landlord’s market.

The record-low vacancy rates indicate that the NSW capital’s rental market is tighter compared to the pre-COVID era, according to Domain.

But there are signs emerging that Sydney’s rental market could be at a turning point, with vacant rental stock slightly increasing in June — ending five consecutive months of falls.

The number of available rental listings in the city stood at 8,024 at the end of June, up 0.6 per cent from May. However, the vacancies are still 44.2 per cent down from the same period last year.

The areas with the highest vacancy rates were Pittwater (2.9 per cent), Manly (2.9 per cent), eastern suburbs – north (2.6 per cent), Ku-ring-gai (2.3 per cent) and Rouse Hill – McGraths Hill (2.2 per cent).

Meanwhile, the areas with the lowest vacancy rates were Camden (0.3 per cent), Campbelltown (NSW) (0.4 per cent), Blue Mountains (0.4 per cent), Sutherland – Menai – Heathcote (0.6 per cent) and Penrith (0.6 per cent).

According to Domain, the return of overseas migrants and international students as COVID restrictions around the world continue to ease will continue to place demand pressure, considering most rent upon arrival.

But it offered that many cities, particularly those that are in the midst of a rental crisis, will begin to see rental conditions stabilise as investment activity continues to rise.

To read more on the ongoing rental crisis, check out our recent articles: Zero vacancies: 20 suburbs where renters are in “desperate” mode and How Australia’s rental market fared at end FY22.

Rental prices

CoreLogic revealed that the low rental supply across Sydney has caused rental prices to rise over the last three months, further deepening the city’s rental crisis.

Data from CoreLogic’s Quarterly Rental Review for the second quarter of 2022 showed that Sydney’s dwelling rents rose 3.9 per cent over the latest three-month period, bringing the average weekly rent in the city to $643.

Compared to June 2021, house and unit rents have risen by 9.3 per cent and 10.3 per cent, respectively.

“Such strong rental conditions through the current cycle have occurred largely in the absence of overseas migration, although the reopening of international borders is likely now adding further upwards pressure on rental demand,” Mr Lawless said.

CoreLogic also noted that the trend in unit rents had made a U-turn over the past year after falling sharply in some cities early in the pandemic.

Sydney and Melbourne unit rents are now rising substantially faster than house rents, with tenants taking advantage of the more affordable medium- to high-density rental options.

Sydney’s gross rental yield also continued to rise over the month, rising from 2.59 per cent in May to 2.7 per cent at the end of June.

“With rental markets expected to remain tight, it’s likely rents will continue to outpace growth in housing values, driving a rapid recovery in rental yields,” CoreLogic’s report stated.

Outlook

While most experts are in agreement that Sydney’s market has officially entered the downturn phase of the real estate cycle, there is much speculation on how much and how long prices will decline.

With more rises to come as the RBA tries to subdue inflation, experts predict property prices in Sydney will fall between 15 and 20 per cent (depending on who you ask) over the 12 months.

“There’s still probably another potentially 12 months ahead of us in this downturn,” he said.

Mr Lawless predicted the market was in the “fairly early stages” of a decline, with the extent of falls contingent in part on how rapidly the Reserve Bank lifts its interest rate to quell inflation.

“Australia’s housing market outlook is becoming increasingly skewed to the downside, with the trajectory of housing values heavily dependent on the path interest rates take,” he said.

With the Reserve Bank now expecting inflation to peak at 7 per cent by the end of this year (up from its estimate of 5.1 per cent in the March quarter), some economists were triggered to take a second look at their forecasts.

ANZ’s forecast for Sydney prices released in mid-June was for a drop of up to 20 per cent by the end of 2023. In May, the major lender was forecasting a fall of only 15 per cent.

The Commonwealth Bank is forecasting both Sydney and Melbourne house prices to drop as much as 18 per cent by the end of next year.

Meanwhile, chief economist at AMP Shane Oliver said Sydney and Melbourne are already seeing “sharp falls” in property prices, with other capital cities likely to follow, after a lag of up to six months.

After revising his forecast for the peak in the cash rate to 2.5 per cent, from 2 per cent, he expects property price declines in Sydney, Melbourne and Canberra of up to 20 per cent over the next 12-month period.

Amid talks of steep declines, some market experts are trying to temper the doom-and-gloom sentiment surrounding the market.

While there is no uncertainty as to how far the housing values will decline, Mr Lawless explained that a fall as deep as 20 per cent would not be as detrimental to the housing market as most paint it to be.

He said that a 10 per cent decline in the market (a figure which is becoming more mainstream across the various private sector forecasts) would take national housing values back to levels similar to July 2021.

Meanwhile, a 15 per cent decline would take the market back to April 2021 levels. As for the steepest market decline forecast, a 20 per cent decline in home values would take the national index to January 2021 levels, and only marginally above where home values were in late 2017, he explained.

Another factor that will safeguard the housing market is that many borrowers have buffers against rising mortgage interest rates, as they have been making repayments above required minimums.

“[This means] most households have a significant safety net if temporarily faced with a change in circumstances,” Mr Lawless stated.

For a deeper insight into how the rising rates would impact the property market and how investors can better position their portfolios for growth amid softening conditions, check out our amazing podcasts.

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