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Are We Nearing the Peak of the Property Boom?

Over the long-term, Australian property prices have moved in one direction – up.

The short-term though, has been a different matter: there have been many times in Australia’s history when prices have remained flat or even gone backwards.

Right now, prices are booming: Australia’s median property price jumped 22.2% between November 2020 and November 2021, per CoreLogic.

But no boom lasts forever.

Sooner or later, price growth will slow from ultra-fast to a more moderate pace. And some time after that, there will inevitably be a period when prices decline. We don’t know when that will be – it might be six months from now or six years from now. All we know is that prices can’t go up forever.

With all that in mind, people have started to ask the question: are we nearing the peak of the property boom?

Big banks expect the market to slow

The big banks certainly think the market is at or near its peak, judging by their forecasts for the next couple of years:

  • Commonwealth Bank expects capital city property prices to rise 7% in 2022 and fall 10% in 2023
  • ANZ expects capital city house prices to rise 6% in 2022 and fall 4% in 2023
  • Westpac expects Australian property prices to rise 8% in 2022 and fall 5% in 2023
  • NAB expects capital city property prices to rise 5% in 2022 (but hasn’t given a forecast for 2023)

Meanwhile, Louis Christopher from SQM Research expects capital city property prices to grow between 0% and 5% next year under his ‘base case’ scenario.

It’s important to take these forecasts with a grain of salt, because new government policies or unexpected global events might shatter the assumptions upon which they rest.

For example, in 2019, Commonwealth Bank forecast Australian property prices would increase 6% in 2020. Then the pandemic hit, causing CBA to predict prices might fall up to 32%. Then federal and state governments introduced a series of stimulus measures, with the result that prices actually rose 3% last year.

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Why the market might slow in 2022

So why do some commentators expect the pace of property price growth to ease next year?

One reason is affordability, with property prices growing nine times faster than wages:

  • Wages grew 2.2% in the year to September, according to the most recent data from the Australian Bureau of Statistics
  • Property prices grew 20.3% during the same period, according to CoreLogic

Such a large disparity between wages growth and property growth is unsustainable, because, eventually, buyers run out of money to keep bidding up prices.

Another reason some commentators expect the market to slow in 2022 is because of changes to lending rules that were recently introduced by APRA, Australia’s bank regulator.

In October, APRA instructed banks to increase the buffer they use when assessing home loan applications. Previously, banks had to make sure a borrower could meet their mortgage repayments if their interest rate rose by 2.50 percentage points (e.g. if you took out a loan at 3.05% and it eventually increased to 5.55%). Now, banks have to use a buffer of 3.00 percentage points (e.g. a loan increasing from 3.05% to 6.05%).

As a result, a small number of borrowers may no longer be able to qualify for loans. Others will still be able to get a loan, but will be able to borrow less. When this change was announced, APRA forecast it would “reduce maximum borrowing capacity for the typical borrower by around 5 per cent” (e.g. somebody’s borrowing capacity falling from $1 million to $950,000). If, in 2022, there are fewer borrowers and they’re taking out small loans, that will mean less buyer competition.

A third, related, reason the market might slow in 2022 is if APRA also instructs lenders not to issue home loans that exceed six times the borrower’s income (a possibility Shore Financial raised in October). That would further reduce buyers’ borrowing capacity.

Fourth, while demand is expected to slow in 2022, supply is expected to rise. Listing numbers have been very low since the pandemic started; if they rise to more normal levels next year, that means there will be an increase in for-sale properties. If buyers have more choice, they’ll feel less pressure to bid up prices.

Time in the market is more important than timing the market

Time will tell what happens to property prices in the next year or two. But as mentioned earlier, history suggests that while the market has sometimes gone backwards in the short-term, it’s moved steadily upwards over the long-term. For example, between 1996 and 2020, Australia’s median house price jumped from $160,000 to $825,000, according to the Real Estate Institute of Australia.

So if you buy a quality property in a quality location and hold it for the long-term, history suggests you will do very well. (That said, past performance is no guarantee of future performance.)

Shore Financial can help you find a loan that suits your personal circumstances.

 

To discuss your options, you can call us on 1300 416 700, email us on info@shorefinancial.come.au or fill in this online form.






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