The impact of rising interest rates is beginning to be seen in Sydney’s highly leveraged housing market, with home values falling -10.1% in the past months.

The double digit decline translates to almost $116,500 in Sydney house values from the city’s most recent peak in February of this year. The RBA has increased the cash rate by 2.5% in the last six months, from 1% at the start of the year to 2.6% as of October. Sydney’s decline follows a rise in property values of 27.9%, or around $252,900, from the “COVID trough to the peak.”

Sydney values have fallen -9.5% since May 3 and -10.1% since their peak on February 13 this year. It’s hardly unexpected that Sydney is feeling the heat, given that it has Australia’s most expensive capital city housing market, making it more vulnerable to interest rate hikes. Despite the -10.1% drop, Sydney property values have a long way to go before wiping out capital gains made during the recent expansion cycle. To return to the levels experienced before COVID, home values would need to drop another -11.4%.

Melbourne’s values have fallen -6.4% since January 14, trailing only Sydney, which has fallen -6.1% from its June peak. Meanwhile, Hobart and Canberra are down -4.7% and -4.4%, respectively, since their month end highs, while Adelaide and Perth are both down less than -1%. Darwin is the only capital city where home values have not yet started to fall, meanwhile, the dwelling values are still -10.1% below 2014 highs.

However, there is some good news for Sydney property owners: the rate of decline has continued to be in a moderate state during the month of October, falling from -2.2% in the four-week period ending in September to -1.3%. The property market continues to decline, with four out of every five houses and flats in our capital city suburbs losing value in the last quarter. Out of the 3027 house and unit markets examined, 79.5% (2405 markets) suffered a drop in value, an increase from the 1293 areas that witnessed a drop in Q2. The data reveal a sharp fall, indicating that the property industry is suffering the effects of the RBA’s periodic cash rate increases. So far this year, interest rates have climbed by 2.5%.

In September, Australian home prices fell by 1.4%, as the market continues to cool in response to rising interest rates and greater living costs.

The most important economic reality right now is neither record low unemployment nor even record high inflation of 6.1%. It is only housing prices that are abruptly falling.  Mortgages have become significantly more expensive as a result of the RBA’s aggressive interest rate increases, and consumers are reacting by exiting the home market, particularly the Sydney housing market.

The Sydney real estate market was the first to crash. It was also the first place to see a drop in house prices in 2017-18, the last time the Australian housing market had a downturn. Melbourne and Sydney have the steepest drops in house prices that have occurred in the most costly segments of the market, mirroring the trend observed last time: reductions began in the most expensive segments of the market and subsequently spread.

Housing prices are more complex than the headlines suggest. They are a massive moving element of our economy, and they are the first to be affected by changes in interest rates. As a result, because of the way it exerts influence over other moving sections of the economy, the RBA must keep a close eye on housing prices.

When borrowers owe more than the house is worth, Australians are to maintain paying down their mortgages. This means that even if property prices decline, the banks will be quite safe. With one exception: If there is a major economic crisis that causes a large number of people to lose their jobs, it may influence Australian borrowers’ decision to continue paying down their mortgage. Being underwater and losing your job are both enough to cause defaults. This is the other major reason why property prices are so important.

Property price is an important driver of the economy. This works in two ways:

1. Consumption Effect

Property trade leads to consumption. You can hire a painter and a landscaper to freshen up a property before selling it. When you buy a home, you will pay real estate agents, mortgage brokers, conveyancers, and movers. Then you’ll usually hire some contractors to patch up a few minor details in your new home. Finally, you will buy some new furniture.

People trade more properties as property prices rise: sellers are keen to come to the market, places stay on the market for a short time, and buyers want to buy before prices rise further. When housing prices fall, the opposite is true. Rising property prices, therefore, have a direct impact on consumption.

2. Wealth Effect

People feel richer when the value of their homes rises, so they spend more. The wealth impact is stronger as people’s wealth increases, hence this applies mostly in older households.

Should we worry? No, and it really depends on the needs of the consumer. Interest rate increases and property price declines are usually a cycle and time can only tell. If you plan to engage in property investment at this time, schedule an obligation free call with Micah Finance Solutions. We can help you understand the whole scenario of property investing and get you the best rates for your mortgage.

This information is provided for general information only and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from financial, legal, and tax advisers. Although every effort has been made to verify the accuracy of the information, we disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy, or omission from the information or any loss or damage suffered by any person directly or indirectly through relying on this information.