With the recent phase of growth well behind us in most parts of the country, attention is squarely focused on how much home values could fall before stabilizing.
After CoreLogic’s National Home Value Index (HVI) jumped nearly 29% during the recent upswing, the extent of the decline in home values remains highly uncertain and largely dependent on the path of interest rates.
Since the national monthly HVI peaked in Aprilhome values are down 4.8% to the end of September, ranging from a 9.0% drop from the peak in Sydney to Darwin, where house values remain at a cyclically high level.
General forecasts of a peak-to-trough decline also vary considerably, but generally range from about 15% to 25% in capitals combined. For context;
- a 15% decline from the April 2022 peak would bring CoreLogic’s combined capitals index back to levels around March 2021.
- a 20% decline in values would see the index 2.2% lower at the start of the pandemic in March 2020.
- a 25% drop in housing values in the capital would bring the index down to 8.3% below March 2020 levels; a reading similar to August 2016.
The risk of home values returning to pre-COVID levels varies by region.
In the capitals, no doubt Melbourne’s housing market is the most vulnerable; a further 4.3% drop in house values would bring Australia’s second-largest city back to March 2020 levels.
This vulnerability is not due to the faster fall in real estate prices than in other cities. In fact, Melbourne’s quarterly rate of decline, at -3.7% in the September quarter, was a lower rate of decline compared to Sydney (-6.7%), Brisbane (-4.3% ), Hobart (-4.5%) and Canberra (-4.4%). Melbourne simply hasn’t seen as much growth in values during the recovery, with a 17.3% increase from the COVID low to the high. This relatively modest increase in values means that Melbourne home values need not fall as far as other capitals before disappearing everything of his COVID earnings.
At the other end of the spectrum, Adelaide home values surged during the growth phase and, since peaking in July, have remained reasonably firm. The market is expected to fall nearly 31% before Church City values return to pre-COVID levels.
Regional markets also look relatively safe from wiping out their COVID gains. The combined regional index is expected to see its values fall another 26.8% before reaching March 2020 levels.
In major areas of the rest of the state, regional Tasmania has the largest buffer, with home values expected to fall 31.0% before reaching March 2020 levels.
CoreLogic’s analysis of Australia’s 86 SA4 regions reveals housing values in only two regions were below pre-pandemic levels at the end of September 2022: Melbourne Inner East (-2.7% compared to March 2020) and Melbourne Inner (-0.2%). The fall below pre-COVID levels in these two regions is mainly due to a greater decline in housing values during the early stages of the pandemic, as well as a softer recovery compared to most others. capital regions. Both markets are currently experiencing a downturn, with home values in East Central Melbourne down 8.5% since peaking in November last year, while values in Melbourne Inner are down 4.5 %.
Housing values in 77% (66) of the 86 SA4 regions analyzed nationwide remain at least 20% above pre-COVID levels at the end of September 2022. These regions were mainly concentrated in Region NSW (12), followed by Region Brisbane (9), Region Queensland (8) and Region Victoria (8).
The large chunk of parts of the country that retain a significant valuation buffer serve as a reminder that home values are likely to drop significantly further before the full gains from COVID are wiped out.
The trajectory of housing values depends a lot on where and when interest rates land. Cash rate forecasts for the four major banking economic units range from 2.85% to 3.6%, while (at the time of writing) financial markets are pricing in a cash rate of 3.9% by August next year. Clearly, there remains great uncertainty about where and when monetary policy and housing values will stabilize.