How much will house prices decline?

Find out how declining house prices could affect both home buyers and homeowners

By Abigail Ocampo|28 July 2022|3 minute read

house in the suburbs

RBA Governor Philip Lowe has warned Aussies to strap in for ongoing rate hikes in an attempt to curb inflation. As a result, house prices are expected to fall in the coming months and years.

What will this mean for prospective buyers and current homeowners? We address the benefits and implications of falling property prices and how this could affect you.

How much are house prices expected to fall?

People with their eye on the property market would have already seen the cash rate rise several times in 2022.

Initially, some economists predicted the official cash rate (OCR) would reach 1% by the end of the year. With the OCR already surpassing this number in July, many economists have now increased their forecast to 2.5%.1 

According to Canstar, if the cash rate reached 2.5% the average variable rate mortgage would climb to 5.15%. Because of this, many experts are expecting property prices to fall, on average, between 15% and 20% in Sydney and Melbourne.1

How is inflation influencing the cash rate?

A steady increase in inflation is a good sign of a stable and growing economy. But, the 5.1% inflation we saw in the March quarter has greatly exceeded the 2-3% inflation target.2 

Philip Lowe has said that the RBA expects inflation to reach a shocking 7% by the end of the year.3 

In fact, housing has contributed strongly to rising inflation, reporting a quarterly change of 2.7%.4 

According to ANZ Senior Economist Catherine Birch, housing will contribute 60 basis points to inflation during Q2 of 2022.4

The only way to curb inflation is to increase the cost of borrowing money to discourage consumer spending. 

Lowe says, “the board expects to take further steps in the process of normalising monetary conditions in Australia over the months ahead.”1

So, Aussies can expect to see further cash rate hikes moving into the second half of 2022.  

What could declining property prices mean for prospective buyers?

If you’re planning on buying a home, you may be relieved to see soaring property prices start to simmer down.

While it is a positive for home buyers that prices have started declining, there are other important key factors to keep in mind.

Interest rates have started to climb after the all-time low 0.10% cash rate streak was broken in May 2022. 

So, home buyers will see their borrowing power dwindle as rates rise and it becomes harder to meet serviceability policies. 

As a result, managing a home loan may become more difficult and costly to obtain.

What is a home loan serviceability test?

The Australian Prudential Regulation Authority (APRA) tightened serviceability tests for home loans in 2021. 

APRA now requires borrowers to have a buffer of 3 percentage points5 on their home loan. So, if you get a home loan with a 3.5% interest rate, the banks must look at your ability to make repayments should your interest rate increase to 6.5%.

Rising rates may make it more difficult for home buyers to obtain a loan and may even temporarily knock some prospective buyers out of the game.

Is housing availability improving or getting worse?

When housing prices fell in 2020 after the onset of the pandemic, many homeowners rushed to sell. 

But surprisingly, while sellers continue to list their properties on the market, they don’t seem to be in a hurry to sell. 

Director of economic research at PropTrack, Cameron Kusher, said that over the past few months, the property market has seen significantly fewer sales.6 So instead, property listings have started to grow.

But, Kusher also noted that property prices were still up 34% since the start of the pandemic.6 This means any price declines we see in the near future will still likely leave dwelling prices above pre-pandemic levels. 

What could declining property prices mean for current homeowners?

If you currently own a property, seeing property prices decline might be making you a little nervous – especially if you’re an investor or you plan to sell soon.

Those who bought a home in the past 2 years, when property prices were at their peak, may find their equity has dropped significantly.

Let’s say, for example, you purchased a median-priced property at the end of 2021 in Melbourne or Sydney with a deposit of 5-10%. You’re an owner-occupier with principal and interest repayments and a 30-year loan term.

If property prices fell by over 20% by the end of 2023, you could find yourself with negative equity rolling off the end of a 2 year fixed rate home loan. 

For those who purchased a home with a 20% deposit, equity could dwindle to as little as 3-4% in Sydney and Melbourne coming off a fixed term under the same conditions.7 

What happens if you fall into negative equity?

A home equity of under 20% means you have a Loan to Value Ratio (LVR) of over 80%.

If your home equity happens to fall below 20%, you may not be able to save by refinancing to a lower rate. This is because you’ll likely be subject to pay Lenders Mortgage Insurance (LMI) if you want to refinance your home loan with an LVR above 80%.

As property prices continue to fall, it will likely become harder for homeowners who bought a property at the peak of the market to refinance. This is especially true for those who purchased a home with a low deposit (and therefore lower home equity) to begin with. 

If you happen to fall into negative equity, it may not be possible to refinance at all, until your equity begins to increase. 

If you’re feeling unsure or overwhelmed, it can help to talk to an expert. Ask for help from your local Aussie Broker, whenever you need it.

Book a chat with an Aussie Broker

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