Why are real estate prices falling sooner than expected?

“The evidence is pretty clear. Prices peaked in the two largest capitals. Affordability has become tight because prices have risen so much. There is a limit to how high they can go,” he said.

“You can’t keep growing indefinitely and that image of affordability started earlier in Sydney and Melbourne.”

He said lending came off a high and values ​​fell on “extraordinary” gains, both pointing to a market cooling regardless of what the Reserve Bank does.

Many buyers are hesitant to pay more and more for a home in the expectation of rising rates.Credit:Joe Armao

The situation is different in other capitals. While listings were higher in Sydney and Melbourne, there were fewer choices in Brisbane, Adelaide and regional Australia, all of which escaped price cuts to see sales conditions remain strong, according to CoreLogic.

It may not last, experts warn. Banks have reduced the amount of their loans, which hit expensive cities first, but could later spill over to more affordable areas.

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AMP Capital’s chief economist, Shane Oliver, noted a sharp rise in fixed mortgage rates, which account for a growing proportion of bank lending books, even though the Reserve Bank did not increase.

Combined with the banking regulator’s change to the service cushion last year – which requires lenders to check whether borrowers could repay their loans if rates were to rise by 3 percentage points – reducing the maximum loan size from 5 to 10% – that means reduced borrowing power for buyers, he said.

“It filters through lower prices. This will impact Sydney and Melbourne first, as these are the most expensive markets,” said Dr Oliver. “The reason prices went down before the RBA did anything is that fixed rates started to rise and they are unaffordable.”

He said while major capitals are leading the price cycle, other cities would be in a similar position later in the year, with the exception of Perth and Darwin.

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“Perth and Darwin are below their last cyclical high in 2014, so their accessibility is much more attractive.”

Dr Oliver also pointed out that the housing downturns in 2017 and 2019 happened without the Reserve Bank raising rates. Instead, they were due to macroprudential tightening that made it harder to get an interest-only loan, or to get a loan if a borrower had large or questionable expenses, which capped the power buying investors in the market.

Westpac chief economist Matthew Hassan said falling values ​​in Sydney and Melbourne highlighted a sensitive property market in terms of lending terms and sellers’ prices, with more homes including choose from now on among the buyers.

“The broader housing market will enter a correction phase later this year,” Hassan said.

“The correction will continue into 2023 and 2024,” he added, saying it would spread to other capitals which would become too expensive for buyers.

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