House price declines starting to slow

House prices move closely with interest rates but they don’t move exactly. House prices began declining in March 2022 even though rates didn’t start increasing until May 2022. Once it became apparent to buyers that the days of ultra low interest rates were over, price expectations were adjusted downwards. It is likely that house prices will start to stabilise before the cash rate peaks.

Some markets are also less sensitive to interest rates. Sydney, Melbourne and Canberra are our most expensive cities and as a result are far more sensitive to the cost of debt. Sydney house prices have now fallen by 10.8 per cent from their peak in February 2022. Compare that to Adelaide where the median is half that of Sydney – prices are down only 1.8 per cent from the peak. Resource capitals Perth and Darwin have seen similarly small declines.

December inflation came in at 7.8 per cent with construction, travel and electricity costs being the biggest drivers. It is likely that we are now at peak. Many of the drivers of high prices are starting to be resolved. Shipping costs are now down almost 90 per cent from their October 2021 peak (as measured by the Baltic Dry Index), while crude oil prices have almost halved from March 2022. China is back open and international migration has started up again. Even construction costs look they are close to plateau. Importantly, US inflation has pulled back from its peak of 9.1 per cent in June to 6.5 per cent in December, with many of the drivers of inflation in this country similar to Australia.

With inflation likely to have peaked, house price declines are slowing. Sydney, the city with the most dramatic decline in house prices, moved only slightly downwards in January. The largest decline occurred in June 2022 and has been steadily declining since that point. Elsewhere we recorded small increases in January.