Property Downturn phase of the cycle in 2022

Yes, we’ve moved to the next phase of the property cycle.

Australia’s property market boom appears to have ended, and now we’re onto the downturn phase of the cycle.

Let’s be clear…some property markets, in particular, Brisbane and Adelaide still growing, but their growth is slow, and in other parts of Australia housing prices are flat or slowly declining.

Here’s what has happened.

The boom phase of the cycle that we saw in 2020-21 saw prices soar, but now as a result affordability has deteriorated.

For context, property prices have surged 29% since the pandemic while wage growth has risen a mere 2.3%.

At the same time, inflation is soaring, making it harder for buyers to save that much-needed house deposit - inflation is at a 21-year high at around 6%, and there is more to come.

Speaking of inflation, the Reserve Bank of Australia (RBA)hiked the official cash rate for the second consecutive month in June to 0.85% in an effort to curb inflation - again, we’re yet to reach the peak with further rate hikes expected before the end of the year.

This in turn has caused fixed mortgage rates to more than double to around 5%, from around 2%.

What does all this mean?

Well, in short, buyers need more money to buy a property…. but they aren’t able to borrow as much.

And the rising inflation and cost of living mean a deposit is harder to save.

It’s easy to see why we’re entering a downturn, isn’t it?

But wait, there is more.

A rise in new listings in Sydney and Melbourne has taken some pressure out of the market, while there has been a shift and rotation in spending from goods back to services on top of a decline in consumer and home buyer confidence thanks to concern about rising rates, inflation, and the future of property values.

As I said, we’re in the downturn phase, and sure, the value of some properties may decrease in the coming year – some by as much as 10% - but that will only be in the short term.

Yet there are still some strong patches in the Melbourne and Sydney property market where A-grade homes and investment-grade properties are still selling well.

It’s a bit like having one hand in a bucket of hot water and another hand in a bucket of cold water and saying, "on average I feel comfortable.”

However strategic investors are not phased by this stage of the cycle, they understand real estate is a long-term game and they’re more focussed on the long-term rise in values rather than short-term slumps.

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Jason Gwerder
Friday, 22 July 2022

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