Sydney property prices seen falling 20% in harbinger for nation

Sydney property prices seen falling 20% in harbinger for nation
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(June 17): Sydney property prices are expected to fall by up to 20% as rising interest rates amplify affordability challenges in one of the world’s most expensive markets. Such a result would likely augur nationwide declines.

Australia & New Zealand Banking Group Ltd economists predict housing in the nation’s largest city will drop by one-fifth this year and next. Bloomberg Intelligence, off a tighter time frame, sees Sydney falling 12-15% in 2022, based on the cash rate climbing to 1.75% by December from the current 0.85%. 

Housing is set to be a key casualty of the Reserve Bank’s drive to remove monetary stimulus as it tries to tackle intensifying inflation. The central bank surprised with a 50-basis point hike last week after starting its tightening cycle in May, and sentiment is already falling among Australia’s heavily indebted households, potentially limiting how fast and far the RBA can move.

Yet a fall of such a scale would still only be a reversal, given Sydney prices soared 25% last year alone, fuelled by near-zero rates and pandemic-era aid.

BI estimates a Sydney couple’s ability to service a mortgage would decline by more than 20%, based on a model that uses average net income of A$140,700 (US$99,000) by end-2022. It also factored in average household expenditure and bank-lending assessment rates for an 80% loan-to-value ratio mortgage.

“The increase in mortgage rates is now expected to be larger and to come at a more rapid pace,” said ANZ bank’s senior economist Adelaide Timbrell. “Given that the average borrower has a large savings buffer, we expect reduced borrowing capacity to be the key driver, not forced selling.”

Sydney is typically a harbinger of trends in Australia’s A$10 trillion residential real estate market. Kieran Davies, chief macro strategist at Coolabah Capital Investments, sees national prices dropping 15% in 2023, 13% in 2024 and 11% the following year for a cumulative decline of 30%. 

If his predictions were realized, that would erase the 22% rise in home values last year and a forecast 8% gain this year. Australia’s median dwelling price is A$752,507, underpinned by heavy borrowing amid low rates, a supply shortfall and surging demand in what’s been a high-immigration economy.

Davies’ predictions are based on money markets pricing in a cash rate of 4.25% in 2024. 

“There is significant uncertainty around the model’s forecasts, but the results suggest a large short-term correction is in store as the RBA takes back its emergency policy stimulus,” Davies said.