How to know when house prices will bottom

“The rate of decline is much worse than what we saw through the previous decline. Wider affordability, higher household debt and then this double factor of inflation and rising interest rates is hitting it harder,” said Tim Lawless, director of Asia-Pacific research at CoreLogic.

This means the biggest factor that plays a role in determining when house prices will start rising again is interest rates, and when the RBA will start its cutting cycle once again.

“When we see starting to see interest rates, which will probably be around the middle of next year, if not earlier than that, that may be a sign that the housing market is starting to stabilize,” Mr Lawless said.

Two signs that we may be nearing the peak of the interest rate cycle are that inflation is starting to fall back into the 2-3 percent target range, and the tight labor market is starting to loosen.

Does the decline (and increase) follow a certain pattern?

Yes, there are certain characteristics that the property cycle in Australia tends to have.

First, when it comes to capital cities, you tend to see Sydney and Melbourne leading the cycle and smaller cities like Brisbane and Adelaide following. Although there are exceptions.

“Perth, for example, is quite disconnected and driven more by commodity cycles and big infrastructure projects, and the same as Darwin. And then there are regional markets that are more agricultural in nature, for example, and more detached from broader trends,” adds Mr Lawless.

Head of research and domain economics, Nicola Powell, said Sydney and Melbourne tended to register larger price swings compared to other capital cities because homeowners were more sensitive to changing economic conditions.

“In general, that’s where incomes are higher, households are more in debt and there’s proportionately greater investment activity … so you tend to see bigger changes, both in price increases as they go up, but they’re also more vulnerable in a downturn,” Dr. . said Powell.

What if you drill down to the city level?

In a similar vein, suburbs and higher-priced areas within cities are often the first to show signs of decreasing, or rising, before spreading elsewhere.

Sydney’s eastern suburbs peaked in house prices in June 2021, so the eastern suburbs have recorded three-quarters of consecutive home price declines.

In lower end markets, in areas such as Blacktown, Central Coast and southwest Sydney, house prices are still rising.

So if you’re trying to pick the bottom of a cycle, keep a close eye on areas with higher prices, says Dr Powell.

“As we move into the recovery phase, we tend to pick it up first at the top end, and the eastern fringes are one of them,” he added.

How long does property decline usually last?

A recent analysis by Domain looking at the cycle duration of the market in Sydney, found that the downturn tends to last less than half the amount of time (in months) than the previous upswing.

“The decline was shorter and less severe than that seen in the gains, in general,” said Dr Powell.

For example, the property boom between 2000 and 2004 lasted 42 months until it peaked, whereas during the subsequent decline, it took only 18 months for prices to fall from peak to next low.

Mr Lawless points out that through each phase of the downturn, the annual gain in housing values ​​in the 12 months leading up to the market’s peak has been equal to or higher from the entire peak to the trough of the next decline.

“During the two-year period leading up to each market peak, the capital gains always outweigh the next peak of the downturn,” he added.

Is it possible to pick the bottom of the market?

Mr Lawless said people should time their decision to buy property on their own circumstances and budget.

“In reality, trying to pick the top and bottom of the market is impossible,” he said.

However, there are several key indicators – a combination of macroeconomic factors and the housing market – that the market may be on the cusp of turning over.

How consumer sentiment is tracked (as noted in the weekly ANZ-Roy Morgan survey and the monthly Westpac-Melbourne Institute survey) offers a timely and “near-perfect” correlation with the housing market.

Any improvement in a consumer’s mindset (a person’s willingness to buy major household items, or their outlook on family finances over the next 12 months) will give you an indication that things are also starting to look to the property market.

“The correlation isn’t perfect, but it’s close to perfect,” says Lawless.

“It really highlights that when consumers feel more pessimistic about their own balance sheets, about interest rates, about their job prospects, that has a negative impact on housing demand.”

Property indicators include the number of listings, the average selling time of the property as well as the discount rate from the vendor.

The number of people who attended, as well as the number of bidders, at the auction, as well as the auction clearance rate (the percentage of properties sold at auction on a given weekend) offer good market barometers, Dr Powell added.

“Sixty percent is considered the benchmark for clearance levels, so if they drop below that usually indicates the market is correcting, and we’re going to see prices going down – and obviously the other way around, when you get around 60 percent.”

Sydney’s auction clearance rate last week fell to 49.9 per cent, the first time it has fallen below the 50 per cent mark since mid-April in 2020.

Is it better to sell or buy first in a downturn?

There’s no one-size-fits-all answer to all of these, but because high-end markets tend to be downturned, it could create a “point in time” for a certain segment of buyers – an upgrade – said Dr Powell.

If you buy into a market where prices drop first, you would ideally sell your home (smaller, less valuable) while prices are still stable, and then buy into an upscale market as prices continue to fall.

Of course, that scenario doesn’t take into account how difficult it is to find a new home, and once you sell it, you could be left in the lurch.

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