09.28.2022 Local News

How Is This Property Market Downturn Different From The Last One?

How Is This Property Market Downturn Different From The Last One?

How does 2022’s market downturn compare with the last time prices fell?

After peaking in January 2022, Sydney’s median property value has been falling. Over the last seven months, it has slipped -by 7.4%, according to CoreLogic, reversing some of the gains it made over 2021.

But how does today’s market compare with the last property downturn? And, most importantly, what lessons can we learn from it about what to expect and when conditions will change?

When did Sydney last have a property market downturn?

While Sydney property prices went down slightly at the start of the COVID-19 pandemic, it wasn’t a true downturn. The market rebounded in the September quarter of that year, quickly reversing any declines so that by the end of 2020, property prices stood above their pre-pandemic level.

Instead, for the last real Sydney market downturn, we need to go back to the period between 2017 and 2019, when the median Sydney property value fell by around 15% over two years.

What happened then?

So much has happened since COVID struck that five years ago can seem like ancient history. But if you can cast your mind back to 2017, you might remember that it was a time when the banks were under scrutiny and the Royal Commission into Banking was being established.

Immediately before then the nation’s property market had been booming. The median value in Australia’s capital cities grew 14.8% between 2015 and 2017, after already growing 34.7% between 2011 and 2015. In between those two booms, there was a small market loss of -0.1%, but by and large, we had almost a decade of growth.

One concern, however, was that a cause of property price growth was that banks had become too lax in their lending. The Royal Commission would later expose some of these lending practices, including fake applications and insufficient checks. But well before the Royal Commission kicked off in December 2017, APRA clamped down on interest-only loans and then the banks joined in, self-regulating to tighten their criteria.

This limited the amount people could borrow and the result was that many people’s borrowing capacities fell by around 20%.

An immediate effect on property prices

As we’ve argued previously, the amount people can borrow is one of the most significant factors that determine property prices. If the banks cut down on the amount they’re prepared to lend, it obviously impacts what people have to spend.

For instance, instead of being able to offer $2 million on a home, a prospective buyer may only have been able to offer $1.8 million. This reduces competition – especially when other buyers are likely to be in the same boat – and prices automatically start to fall.

What ended the last slump?

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 loans 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 long 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.

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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 pledging 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 – meaning the median price rose 12.7% in just eight months. Then, of course, COVID hit.

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’re more or less being forced to raise 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?

While today’s economic conditions sound ominous, it pays to remember that the history of the Sydney property market is one of the prolonged upswings followed by short, sharp falls.

Domain’s own analysis of 30 years of Australian property data found that upswings lasted an average of 33 months, and prices rose an average of 32.7%. On the other hand, downswings lasted an average of nine months and prices fell an average of 3%.

Interestingly, the pandemic boom lasted 21 months and prices lifted 33.6% nationally. But if it is seen in conjunction with 2019’s gains, its duration was actually very close to the average. This should give us some hope that the current downturn shouldn’t last too long either.

There are also other reasons to be optimistic. The economy is actually growing fast with a record number of new jobs being created. The unemployment rate is also at close to a record low of just 3.5%. Meanwhile, our balance of trade (or the amount we sell overseas) is at an all-time high; and wages – although not keeping pace with inflation – are finally growing.

In short…

While there are a lot of similarities between the 2017-2019 downswing and today’s, there are also some differences. The important thing to remember is that declining markets always eventually end.

After all, the long-term trend for Sydney property prices has always been upwards, no matter how challenging the near term might look.

Want more?

If you’d like to find out more about downsizing in Sydney’s Eastern suburbs, get in touch with our team today.