Property market update: Sydney, July 2022

While Sydney (along with Melbourne) led the dramatic turnaround in dwelling values across the country, it is not alone in its boom-to-gloom transition. According to the latest data from CoreLogic, the housing downswing appears to have accelerated in five Australian capital cities — which brought the national dwelling index down 1.3 per cent over the month.

CoreLogic’s research director Tim Lawless forecast that market conditions would gradually worsen as interest rates continue to surge through to the end of the year.

“The rate of growth in housing values was slowing well before interest rates started to rise, however, it’s abundantly clear markets have weakened quite sharply since the first rate rise on May 5,” the expert commented.

Currently, the country’s official cash rate stands at 1.85 per cent following four consecutive higher-than-normal hikes by the Reserve Bank of Australia, as the regulator looks to reign in the surging inflation.

Mr Lawless explained that despite the market downturn being in its nascent stage, the current rate of decline is “comparable with the onset of the global financial crisis (GFC) in 2008, and the sharp downswing of the early 1980s.”

But the pundit highlighted that Sydney’s drop is already more precipitous than those earlier eras of decline.

For perspective, he cited that Sydney’s values are down 5.2 per cent from January’s peak — deeper than the 3.9 per cent drop at the start of the GFC in 2008.

“Even going back to the early 1980s, it wasn’t going down as rapidly as this,” he noted.

The reversal of property values likely has a long way to go, with a halt in the rate rises — and perhaps even cuts — next year likely to put a floor in the market, Mr Lawless said.

However, the expert stated that the relative changes brought on by the softening conditions would likely vary widely across capital cities due to the differences in the rate of price upswing that markets experienced from the COVID trough to the peak.

Melbourne, for instance, had a milder upswing than other capitals, with prices up 17.3 per cent. With such figures, Mr Lawless explained that a 10 per cent decline in Melbourne would take the city back to levels roughly the same as July 2017.

He expounded that the same 10 per cent decline will have a different impact on Sydney, where property values have risen 27.7 per cent from the pandemic low point to the market peak.

“So it’s quite a different scenario from city to city,” he stated.

But there may be positive news on the horizon, as forecasters say the central bank could unwind its monetary policy and begin cutting rates next year — a move that is seen to prop up property prices once more.

Before we examine what analysts predict for the city, let’s see how Sydney performed in July 2022.

Property values

Data from CoreLogic revealed that Sydney’s property values continued to tumble in July, with the city posting a 2.2 per cent decline over the month.

The latest monthly figures mark a deeper decline from the 1.6 per cent drop in dwelling values in June and a further weakening from the 1 per cent monthly fall recorded in May. It also represents the city’s sharpest decline in value in almost four decades.

As a further indication that the city’s downturn is picking pace, the city’s property values were down by 4.7 per cent in the last three months — a significantly bigger contraction from the 1.4 per cent decline seen in the previous quarter.

Over the year, the median value of dwellings in Sydney is now just up by a meagre 1.6 per cent, further falling from the 5.9 per cent annual growth rate seen in June.

While Sydney was once again crowned as the most expensive capital city to buy a property, the average cost of a dwelling in the NSW capital fell by $23,284 over the month to $1,087,376.

The month-on-month price drop is also more than double the $10,000 reduction in average dwelling costs recorded in June.

As the downturn has started to accelerate, it’s becoming more evident that units are holding their value more so than houses. Data from CoreLogic showed that during the month, unit values fell by 1 per cent while houses declined by 1.5 per cent.

“This trend is most apparent across the three largest capitals as well as Canberra, where housing affordability challenges may be deflecting more demand towards the medium to high density sector,” Mr Lawless said.

He added that the unit market is propped up by the stronger interest from investors who favour the unit market over houses as “demand [for units] has historically been more concentrated”.

Over the month, Sydney’s housing market tallied a steep 2.5 per cent drop in median values, indicating a further slow down from the 1.8 per cent decline recorded in June.

The monthly figures represent the fourth consecutive month of falls for the sector this year.

Compared to July 2021, median house prices are up by just 2.1 per cent, with the average price of a Sydney house now at $1,346,193. On a monthly basis, the median price of a house in the city has fallen by more than $57,000.

While the city’s unit sector did not suffer the same tumble in values, the city’s unit sector was not spared from the market downturn in July.

The sector recorded a 1.5 per cent fall in median values during the period, continuing from a 1 per cent drop seen in June and the 0.7 per cent fall seen in May.

On an annual basis, units are up by just 0.3 per cent, with the median price for apartments falling by more than $14,840 over the month to currently stand at $806,310.

Supply and demand

While listings and market activity are expected to slow down over the traditionally quiet winter season, data showed that Sydney is suffering from a supply glut due to weak demand.

Data from SQM Research showed that total residential listings in Sydney rose 6 per cent over the month from 29,761 in June to 31,540 in July.

New listings (or properties that have been on the market less than 30 days) in Sydney fell by 1.8 per cent from 12,424 in June to 12,206 in July. Compared to the same period last year, fresh market stock in the city is also up by 5.3 per cent.

Data also showed that old listings or property listings over 180 days rose by 0.7 per cent from 3,911 in June to 3,939 in May, indicating a slowdown in absorption rates. Year on year, old housing stock in the NSW capital is also up by 5.7 per cent.

Managing director of SQM Research Louis Christopher said that vendors were “largely unsuccessful” in selling their properties in July.

Further commenting on the monthly figures, he stated: “There is now a clear trend across all cities of rising listings which is being driven by lower buyer interest and is ultimately symptomatic of the national housing downturn.”

He also cautioned that the upcoming spring selling season would be “a very tough one” for property sellers and their agents.

Mr Christopher advised vendors to consider making further concessions in order to seal a deal during the upcoming season.

CoreLogic’s listings data mirrored SQM Research’s monthly figures. According to the property data provider, total listings in Sydney and Melbourne are 8 to 10 per cent above five-year averages.

The two cities are the only outliers among capital city markets. For comparison, Brisbane, Adelaide and Perth are recording advertised supply levels that are more than 30 per cent below the five-year average.

Commenting on the national trend of supply, Mr Lawless said: “So far, the flow of new listings has followed the normal, seasonal pattern through winter, with the flow of new listings declining relative to the warmer months across most regions.”

But while national inventory remains low, the supply and demand dynamics across the country will change through spring as new listings ramp up at a time when demand is likely to be lower, according to Mr Lawless.

“A more substantial flow of advertised stock against a backdrop of falling demand is great news for active buyers, who will have more choice and less urgency, but bad news for vendors, who could find selling conditions become more challenging as advertised stock levels rise,” he said.

On the demand side, CoreLogic’s estimate of sales activity in Sydney over the latest quarter to July fell by 39.8 per cent compared to the same period a year ago.

As interest rates continue to rise, Mr Lawless predicts home sales to slow down during the second half of the year and into 2023, as buyers act with more caution.

“There is a good chance the number of properties sold in the second half of this year and into 2023 will continue to trend lower as higher interest rates, a more cautious lending environment and a reduction in household confidence continue to weigh on housing demand,” he stated.

Auction market

Sydney’s clearance rates continued to trudge below 60 per cent in July, as rising rates sap buyers’ appetite and bidding wars at auctions become a thing of the not-so-distant past for the market.

Data from Domain showed that the city’s clearance rate rose by 1.8 per cent over the month to 51.9 per cent at the end of July.

While Sydney celebrated a small win by recording its first monthly gain in clearance rates for the first time since February, the city’s clearance rate remained below the healthy 60 per cent threshold.

Domain also highlighted that July marked the third consecutive month of the city tallying a clearance rate below 55 per cent, the weakest outcome since May 2019.

The figures are also 18.5 per cent down from the clearance rate the city recorded during the same period last year, the third biggest annual drop of all the capital cities, behind only Canberra and Brisbane.

Sydney was the only capital city to record a positive monthly change for both house and unit clearance rates. Over the month, houses rose by 2.5 per cent to 53 per cent, while units rose by 0.2 per cent to 49.2 per cent.

The median auction price for houses in the city stood at $1,662,000 at the end of July, representing a 7.7 per cent decline in average house price tags over the month.

Over the year, the figures are also down by 2.5 per cent, the city’s first annual decrease in the average auction price for houses for the first time since September 2019.

For units, the median auction price stood at $720,000, representing a 0.7 per cent decline month on month. Compared to the same period last year, the figures are also down 5.9 per cent.

Domain chief of research and economics Dr Nicola Powell commented that rising interest rates “have further accelerated downward pressure on prices, affecting buyers’ borrowing power and adding further strain to mortgage affordability”.

“This is weighing on buyer sentiment and confidence and impacting clearance rates,” Dr Powell said.

She added that Domain also reported a higher rate of withdrawn auctions, “which indicates weakening market conditions as sellers are pulling their homes from auction and possibly looking at other sales methods instead”.

Sydney recorded the greatest proportion of sold prior and withdrawn auctions of all the capitals. Out of the 3,109 scheduled auctions in the city throughout the month, data showed that 26.9 per cent were sold prior to being on the slate, while 25 per cent didn’t even get to go under the auction block.

Separate data from CoreLogic showed that properties 3,297 went under the hammer in the city throughout the month, with a final average clearance rate of 51.56 per cent.

Last month, 3,961 properties were auctioned in Sydney, with a final average clearance rate of 56.5 per cent.

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

The availability of rental properties across Sydney has hit a new record low in July, with more people than ever struggling to find a place to live in.

Domain’s data showed Sydney’s vacancy rate has fallen by 10 basis points over the month to a record-low vacancy rate of 1.3 per cent, adding pressure to the city’s worsening rental conditions and highly competitive environment.

Vacant rental stock in Sydney also fell to its lowest level since April 2017. The number of available rental listings in the city stood at 7,302 at the end of July, down 9 per cent from June. The figures are also down by 47.2 per cent on an annual basis.

The areas with the highest vacancy rates were Pittwater (3 per cent), Ku-ring-gai (2.6 per cent), eastern suburbs – north (2.5 per cent), Manly (2.3 per cent), and Rouse Hill – McGraths Hill (2.3 per cent).

Meanwhile, the areas with the lowest vacancy rates were Camden (0.2 per cent), Blue Mountains (0.4 per cent), Richmond – Windsor (0.4 per cent), Campbelltown (0.5 per cent), Sutherland – Menai – Heathcote (0.5 per cent).

Dr Powell said vacancy rates had been steadily decreasing for the past 12 months. “Nationally, vacant rental listings are 45 per cent lower over the year and have fallen across most of the capital cities,” she said.

“The rental market remains firmly in favour of landlords’ across every capital city, with a shortage in rental supply driving up asking rents and further escalating competition between tenants.”

But she said that while times are tough for tenants, there could be signs vacancy rates could ease.

“While vacancy rates have fallen in July, we could see rental conditions stabilise in the coming months with the rise of investment activity helping to alleviate tightening conditions,” she said.

Rental market

While Sydney’s house prices are retreating at a quick pace, rental prices in the city are not following suit, as the latest data showed tenants in the city are facing rapidly rising housing costs.

In its latest rental report, Domain noted that Sydney is firmly operating as a landlords market, as a shortage in supply and availability of vacant rentals drive up asking rents and further escalate competition between tenants.

House rents jumped by 3.3 per cent in Sydney over the June quarter to a new record high of $620 a week, the steepest annual increase since 2009, according to Domain.

Unit rents are also set to hit a new record high next quarter as they rise faster than houses, after surging by 5 per cent over the latest three-month period to $525 a week.

So far, the decline in property prices has not translated into a slowdown in rental costs, but Dr Powell said there are signs that the tide is turning.

“(Rental) yields are also rising across every capital city for houses and most for units — this suggests purchasing prices are fairing weaker than rents and boosting yields, so it is a good time for investors to get into the market,” she stated.

She enumerated the factors that could help the rental market get some breathing room in the coming months. “We need to continue to see an increase in investor activity, address the supply of social housing and ensure we have the right government incentives for first home buyers. This will no doubt have a positive impact on easing rental conditions,” Dr Powell said.

Separate data from CoreLogic showed rents continued to trend higher through July. In Sydney, house and unit rents rose by 9.4 per cent and 10.4 per cent, respectively, on an annual basis in July.

The figures are higher than the 9.2 per cent annual gain recorded in May for houses and the 9.8 per cent increase recorded by units during the same period.

Amidst rising rents and a general easing in home value growth, Sydney’s rental yield growth continued to stage a strong recovery. The city’s gross rental yield stood at 2.8 per cent in July, up from 2.7 per cent in the previous month.

“Such tight rental markets, improving yields and stronger buying conditions should help to keep a floor under investment demand,” Mr Lawless said.

What’s next for Sydney’s property market?

With inflation and interest rate hikes remaining the driving force behind the current market downturn, most market analysts forecast there’s some way to go before rates hit their peak, with estimates varying from the mid-range 2 per cent up to the 3 per cent.

CoreLogic noted even the best-case interest rate scenario indicated that variable mortgage rates would roughly double from their current level.

“As borrowing power is eroded by higher interest rates, and rising household expenses due to inflation, it’s reasonable to expect a further loss of momentum in housing demand,” Mr Lawless explained.

Despite this, there is optimism that the Reserve Bank will begin unwinding its monetary policy by cutting the cash rate again at some point in 2023, which Mr Lawless said will revive growth in Sydney’s housing market.

“When interest rates start to stabilise, or potentially reduce next year, this could be the cue for housing values to find a floor,” Mr Lawless explained.

And as the market gears up for the spring selling season, experts predict that total listings on the market may finally return to average levels and will serve as a true test of buyer demand levels in the market.

“By late spring or early summer, we could be seeing advertised stock levels trend higher than normal. Vendors are likely to be more competitive across a smaller pool of active buyers, which would drive clearance rates lower across auction markets, and could result in longer selling times and larger discounting rates for private treaty sales,” Mr Lawless said.

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