Property outlook warns of downside risks despite end-of-year slowdown

Recent findings from CoreLogic’s annual Best of the Best report have highlighted Australia’s property market performance and what to expect heading into 2023. 

The report flagged the slowdown in the pace of decline towards the end of the year as a distinct feature of 2022’s capital growth, as a steep monthly decline of 1.6 per cent was recorded in August, followed by values falling by just 1.0 per cent in November.

However, the report noted that an increase in interest rates or an unwinding in the labour market outlook could see this trend re-accelerate and warned that the outcome of the slowdown is still in its “early days”.

Eliza Owen, CoreLogic’s head of research, also believes that the rate of decline could pick up speed once more, despite suggestions that Australia has moved past the peak of home value declines. 

“As we move into 2023, there continues to be a mix of headwinds and tailwinds for housing market performance,” Ms Owen said. 

With the CBA revising its terminal cash rate forecast from 3.1 per cent to 3.35 per cent, CoreLogic suggested that further rate rises at the start of 2023 are expected to put more pressure on property prices until the cash rate peaks in early to mid-2023. 

Moreover, CoreLogic forecasted in tangent with the Reserve Bank’s (RBA) December monetary policy statement that further increases in the cash rate in the period ahead are “expected.”

“With expectations that the bulk of the rate tightening cycle occurred in 2022, housing value declines could find a floor in the new year,” Ms Owen explained.

“However, the extent of the floor in values could be further weighed down by mortgage serviceability risks, particularly for those rolling out of record-low fixed mortgage rates through the second half of the year.”

According to the RBA, the portion of fixed-interest mortgages grew from around 15 per cent in the six months preceding COVID-19 to more than 40 per cent between April and November 2021. 

CoreLogic warned that, with 66 per cent of fixed-term housing lending terms set to expire at the end of 2023, these conditions could place downward pressure on prices if the variable rate environment leads to more motivated selling. 

In spite of this, Ms Owens concluded that “strong rental markets and improving affordability from the point of falling values, may entice investors and first home buyers into the market, underpinning a recovery in buyer activity in the second half of 2023, when the cash rate stabilises.”

[Related: Mortgage serviceability a test in 2023]