Soaring house prices hit record levels in Australia in 2021, resulting in uncertainty and anxiety for homebuyers and for stakeholders right across the market. In Sydney, house prices rocketed by 19% in the 12 months leading up to October, while in Melbourne we saw growth of 15% for the same period, representing the fastest increase in over three decades.

Not only is this pricing homebuyers out of the market — the median price for a property in Sydney NSW was reported to be $1.19 million in September of this year — but it’s also unsustainable. House prices can’t continue to skyrocket indefinitely, so the question is: what happens next?

Growth Slows in the Immediate Future

It looks likely that growth rates will slow in the immediate future. This slowing of growth has already been in evidence across the winter, as the unaffordability of houses prohibits many buyers from entering the market. While prices were rising at around 3.7% per month in Sydney in March and around 2.4% in Melbourne at the same time, both of these growth rates have fallen by half over the winter.

It looks likely that this slowdown will continue. If first-time homebuyers cannot access the market, demand will fall as a result. If demand falls, rapid price growth cannot be sustained.

Widely Different Growth Projections Across the Country

However, while price growth has been slowing dramatically in Melbourne and Sydney, in other markets prices are continuing to soar. Brisbane now features the country’s fastest-growing property prices, as values rose by 2.5% in October, with Adelaide and Hobart not far behind on 2% growth.

This is a major contrast to markets such as Perth in Western Australia, where prices fell for the first time in 16 months, shrinking by -0.1%. Growth may be slowing across the country, and even falling in some markets, but properties’ prices remain extremely high, keeping the pressure on for buyers.

The Market Becomes More Difficult for Buyers and Borrowers

Since November 1, stricter controls have been placed on borrowing in Australia. This makes things very difficult indeed for first-time buyers, who cannot leverage capital already built up in another property. As the ratio of average house prices to average wages is now around 12 to 1, it is simply impossible for many first-time buyers to borrow the capital they need.

Effectively, this means a significant portion of the home buying pool cannot access the market. This will lead to further cooling for house prices across the country.

Increasing Interest Rates in the Medium Term

Philip Lowe — the governor of the Reserve Bank of Australia — has said that there will be no increase in mortgage interest rates in 2021. This means the current interest rate of 0.1% — an all-time record low in Australia — will remain this way until at least the end of the year.
However, it does look likely that the interest rate will be increased sooner rather than later. Initially, the Reserve Bank said that there would be no increases in mortgage interest rates before 2024, but this looks likely to change. With skyrocketing house prices, the interest rate may experience a hike earlier than scheduled. This may make fixed-rate mortgages a more attractive option as homebuyers seek to lock in the current record low interest rates over the longer term.

Market Stabilisation, not Hyperinflation

It is hoped that decelerations in house price growth will result in a soft landing for the market, bringing about a period of stability. Some have warned that increasing house prices in markets such as Australia and the United States could bring about a worldwide contagion of hyperinflation, effectively devaluing currencies across the world. However, this situation should be avoided with the proper economic stimulus and the right support for buyers.

In the medium to long term, we can expect the curve to flatten as the market runs out of steam. From then on, it looks likely that the market will stabilise on its way to a house price soft landing, avoiding the economic shock of a housing crash — that is, providing that banks and government manage the situation with care.

Effective Mortgage Broking in a Difficult Landscape

The property market is difficult at the moment, especially for first-time buyers. Difficult, perhaps, but not impossible. You simply need the right expert guidance to find you the home loan or mortgage to suit your situation.

Reach out to the Sydney Brokers team to get started. If you are a First Home Buyer looking for a home loan, schedule a consultation and let us help you find the mortgage you need