(Bloomberg) -- Sydney, scene of some of the world’s fastest house-price growth, is showing early signs of turning down.
Having soared almost 27% in 2021, the city’s stratospheric prices, growing supply and talk of interest-rate rises are souring people on buying. The epicenter of Australia’s A$10 trillion ($7.2 trillion) residential market and home to roughly a fifth of the population is seeing a change in psychology.
“People were very, very panicky about missing out last year,” said Matt Cleland, a buyers agent at PMC Property Buyers in Sydney’s northern seaside suburb of Manly. “All that panic has diminished now. There are quite a few properties that are having to reduce prices.”
A key economic impact of a market reversal would be an inversion of the wealth effect, where homeowners consume more as prices rise. It could also weigh on the job market as declining s have significant spillovers in Australia, where construction is a major employer. Indeed, the Reserve Bank was taken aback before the pandemic at the hit from the last correction.
Soaring house prices aren’t all good news, either: Australia’s debt-to-income ratio has climbed to almost 185%, according to the latest data, which is from the end of September. The prospect of the first rate hike since 2010 suggests higher mortgage repayments will further eat into consumption.
“Households may feel a little bit less wealthy,” said Belinda Allen, a senior economist at Commonwealth Bank of Australia, the nation’s largest lender. “There’s a higher elasticity on spending with wealth on things like cars.”
Early signs of a downturn in a city like Sydney can be obscure. Eliza Owen at property consultancy CoreLogic Inc., says a key leading indicator is diminished demand for homes in high-traffic locations in popular inner-city areas.
One such spot is Addison road, a busy thoroughfare in the gentrifying inner-west suburb of Marrickville, where a slew of houses sold in rapid succession. But the latest property to hit the market, a three-bedroom, one bathroom pile, drew little interest at open inspections and then failed to sell at auction.
It has now been listed for sale at A$1.69 million, below the lower-end of the A$1.72-A$2.3 million for comparable homes in the area sold recently.
“It really does start to stem from the inner city suburbs and that’s where we think some of the deepest declines at the moment are,” Owen said. “Then it gradually tends to ripple out into more peripheral areas of Sydney.”
CoreLogic estimates the number of properties on the market has climbed by 5% as sellers try to cash in before the boom ends, further weighing on prices.
Australian regulators have also been tapping the brakes on property. In October, they raised the minimum interest-rate buffer that lenders need to account for when assessing home-loan applications, citing growing risks to financial stability. They signaled more curbs were likely to come.
What Bloomberg Economics Says...
“Rising interest rates and the prospect of tighter macro prudential policy are major headwinds for Sydney’s property market, given rapid increases have resulted in house prices testing affordability limits.”
-- James McIntyre, economist
Australia isn’t alone in struggling with frothy asset markets and housing in bubble territory. Prices from New York to Tokyo have been soaring in response to cheap finance. Australia’s cash rate currently stands at a record-low 0.1%.
Sydney is currently the world’s least affordable housing market after Hong Kong, with the median price 15.3 times the average household income in 2021, according to the Demographia International Housing Affordability 2022 Edition. Since before the pandemic, Sydney median prices have risen 4.3 years of median household income, it said.
Bloomberg Economics expects Sydney will be Australia’s worst-performing market this year, forecasting a 3% decline. Commonwealth Bank predicts a similar drop.
Others say the fall will begin this year and then intensify in the next: National Australia Bank Ltd. expects an 11.4% fall in 2023; AMP Capital Markets sees a 1% decline this year and then a 10% tumble next; and Westpac Banking Corp expects a flat outcome then a 9% drop in 2023.
Buyers agents say there is more evidence of demand drying near the top-end of the market.
“I just got a call from an agent regarding a house which is really struggling at his price guide. He is suggesting to me that we could buy it cheaper than they thought at the commencement of the campaign,” Cleland said. “There’s quite a few examples of that stuff going on.”
©2022 Bloomberg L.P.
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