might be a long one on

this occasion.

We're not expecting the market to turn around anytime soon.

I think we'll continue to see housing values fall through spring at least, probably through summer.

as well.

We generally look for some sort of a catalyst that's going to turn the market around.

That could be anything like some sort of stimulus You know, in the past downturns, it might be a first home buyer in the spring.

Is there anything within each of those markets that explains the different results? Or is this a national trend that's not separated really by local issues?

And we know affordability was already an issue before this anyway.

Yeah, I mean, it's pretty hard to unpack this and allocate some level of contribution.

Personally, I think interest rates have a lot to do with it, alongside the heavily indebted household sector, which simply makes households much more sensitive to changes in the cost of debt.

But even before interest rates were rising, we were seeing the housing market was slowing down.

In fact, Melbourne peaked in November, Sydney peaked in February.

So Melbourne a bit earlier than higher rates.

So I think affordability and just sentiment has a lot to do with it as well.

Okay, so how is this likely to feed through to the rental market?

And we know affordability was already an issue before this anyway.

Yeah, I mean, it's pretty hard to unpack this and allocate some level of contribution.

Personally, I think interest rates have a lot to do with it, alongside the heavily indebted household sector, which simply makes households much more sensitive to changes in the cost of debt.

But even before interest rates were rising, we were seeing the housing market was slowing down.

In fact, Melbourne peaked in November, Sydney peaked in February.

So Melbourne a bit better earlier than higher rates.

So I think affordability and just sentiment has a lot to do with it as well.

Okay, so how is this likely to feed through to the rental market?

Is that happening?

Well, we're definitely seeing housing prices coming down and that is making homes more affordable in one sense.

But of course, that's been offset by 75 basis points of interest rate hikes.

So it's still more expensive to service a loan now than it was when housing prices were lower.

So I think most first home buyers, even though it is very much a buyer's market now, there's a lot of stock to choose from and prices are coming down.

We're not really seeing any signs that first home buyers are coming back into the market just yet.

I think they'll be holding off until a little bit of confidence returns to where the interest rate

The lower end of the market, is that falling as much as the higher end of the market?

Will rents go up?

Well, absolutely.

Uh, rental markets were already extraordinarily tight.

Uh, everywhere around the country, we're seeing vacancy rates generally sub two percent.

And investors, of course, are the primary delivery channel for, for rental supply.

So it, it's hard to know how rents, how much rents can go up, given renters are already dedicating a record amount of their incomes towards paying rent.

So we'll probably see ongoing upwards, uh, pressure on rents, but also rental households becoming larger.

... is going to make the cost of living crisis worse.

So, Tim, is the opposite to what the intention was of the government actually happened?

Well, it is at the moment.

And I think, I mean, to be fair to the government, I think this is partly cyclical as well.

The fact that we have seen even owner-occupier applications for Westpac were down 18%.

Investors were down 26%.

So, I think for a lot of buyers, there's simply a lack of confidence in the housing market at the moment.

Nobody wants to buy when housing prices are falling for obvious reasons.

Will rents go up?

Is that a promising sign this time of year?

Good morning, Shobo.

Well, it's certainly a lift and 47% was remarkably low.

And I think that was really just the shock of the budget being sort of flowing through to more vendors withdrawing their homes from the market.

But at 55%, that's still, you know, the long run average is a clearance rate of about 66%.

That's generally where you'd expect the market to be quite balanced.

When prices are rising, you'd expect clearance rates to be above 70%.

seeing weakness across all the major property markets or are some cities holding up better than others?

How about in Australia then, Tim? What have been the kind of key trends, I suppose, over the last few years, maybe since COVID? And why do you think your market might have been more resilient than we've seen in New Zealand over that period of time?

Yeah, there's some similarities and there's some pretty big differences as well.

We definitely didn't see values as strong, the growth in values as strong as New Zealand through the pandemic.

Our national index peaked at about 25% growth in the year to November 2021.

So well below, I think, New Zealand was getting up in sort of the high 30s or 40s, right, in terms of annual growth.

So it didn't have as high a peak to fall from in some ways.

But also, I mean, through the pandemic, there was a huge amount of stimulus and we started moving interest rates up and all the stimulus was pretty much expired.

Where's the labour market and unemployment at? Is that where the weakness is starting to come through? And that's what's weighing on that sentiment as well, if you start to see that acceleration of job losses.

Does the data reflect those kind of doomsday predictions at the moment?

Well, in some ways it does, in some ways it doesn't.

We don't track registered bidders, for example, and that's what a lot of auctioneers and real estate agents are seeing is just an absence of competition.

in the market we can definitely see that in our demand numbers the number of home sales for example we look at quarter on quarter compared to a year ago for example we're seeing transaction numbers are down more than 20 percent compared to last year much more substantially in Sydney, Melbourne and Brisbane as well down more than 20 percent so we can see that we can see the fact that vendors are starting to retreat from the market we're not seeing as many fresh listings being added simply because selling conditions are pretty tough But with demand down as much as it is, we've actually seen an accumulation of stock on the market.

Despite fewer vendors, homes are taking a lot longer to sell.

So for buyers, it does mean there's a lot of choice out there.

There's not any urgency.

How would you sum up the market at the moment compared to other years, generations? What are we dealing with here?

So why is it so split? Why are we seeing higher value properties decline but lower value ones making some small gains?

Well, we've been seeing this trend for some time now, and I think it's a reflection of probably three things.

Most importantly, it comes back to affordability and serviceability.

So with housing costs still very expensive and interest rates quite high, we're seeing more mainstream demand being deflected towards those lower price points, simply because that's where a typical household can demonstrate an ability to service a mortgage.

But also that's where we're seeing some stimulus.

First home buyers, at least leading into the budget, were still quite active, taking advantage of, say, the 5% deposit guarantee.

And also that's where investors tend to be more active as well, is around those lower price points.

OK, what's happening in regional areas?

Just explain what you were trying to, to tell investors there.

Yeah.

I mean, the market's moved from being quite strong at the end of last year to one that's now moved into reverse.

That's obviously broadening geographically.

So the context is really important, I think here, James.

The fact that over, you know, look at, say, the last five or six years, we've seen Australian housing values have increased by, you know, ar- around about 31%.

Some markets, like Perth or Brisbane or Adelaide, over six years have more than doubled.

I know it's hard, but, like, how bad can this get? Or what would history suggest to us in terms of if it's a normal downward cycle, how long do they last?

What is driving this correction? Uh, are you putting it to a mixture between the higher interest rates, but then also Labor's tax changes, or is it both of those?

Uh, good evening, Janie.

Well, it's both of those, but it's other things as well.

We actually started to see the housing market slowing down late last year simply due to affordability constraints.

And then of course, rate hikes, 75 basis points of them, have, uh, have certainly dampened demand.

Very low levels of consumer confidence, especially when, uh, when petrol prices jumped, is another factor.

And then you've got the downside impact of, of the federal budget as well, which isn't just about a pullback in investment, it's also about a lack of confidence in policy.

Now for, for me and, and the viewers at home, can you just explain to us why that number is so important and what it does for renters?

Insurance, et cetera

... all that sort of stuff.

So yield was always, well, for most investors, a side thought or a secondary or tertiary part of the decision-making.

Most investors will be buying for, for capital gain.

But now that we've seen the negative gearing component being removed for established homes in the budget, even though it's not legislated yet, I think it's virtually the same as.

I think most, most people would accept this is gonna get through Parliament.

It'll, it'll be the new rules.

Um, does Cotality look at the future of interest rates and, uh, what are you guys thinking about that?

It seems like housing affordability is declining with the number of properties on the market.

Well, there's a few ways to look at this, I think, James.

I mean, absolutely, it, it, it doesn't look like we're seeing buyers coming back into the marketplace despite housing prices coming down.

A big part of that is simply confidence.

Uh, you know, y- generally, a lot of people don't want to buy into the marketplace when prices are falling for fear of very expensive assets suddenly becomes worthless, uh, uh, the following day.

So I think eventually we probably will see first home buyers venturing back, but that probably means we need to wait until interest rates come down, which is probably next year, and when a bit of confidence returns to the marketplace as well.

And I presume that's going to have effects because, you know, as homeowners and people with mortgages start to feel poorer, they're gonna start doing less in the economy.

economy.Great points.

So for more, he is Tim Lawless, the Head of Research at Cotality.

I think probably the biggest component of the downturn is a 75 basis point rate hike.

That certainly has a macro impact on the market.

It affects serviceability and borrowing capacity.

It affects confidence as well.

It's a lot harder to understand the implications of the budget handed down on May 12th just yet, anecdotally.

We're hearing about investors pulling back pretty sharply as well as other segments of the market inactive simply because of a lack of confidence in what the market's doing.

So for more, he is Tim Lawless, the Head of Research at Cotality.

I think probably the biggest component of the downturn is a 75 basis point rate hike.

That certainly has a macro impact on the market.

It affects serviceability and borrowing capacity.

It affects confidence as well.

It's a lot harder to understand the implications of the budget handed down on May 12th just yet, anecdotally.

We're hearing about investors pulling back pretty sharply as well as other segments of the market inactive simply because of a lack of confidence in what the market's doing.

How much of a role has the government's tax changes had in reducing the value of homes, particularly in metropolitan Melbourne? And is it a case of the changes that have been made to taxation in relation to investors that has also seen house prices drop?

Well, it's hard to know what the impact has been so far from the federal budget hand down.

What we can see from some of the other state-based policies in Victoria in particular that have heavily disincentivized investors like higher land tax and lower land tax thresholds is that investors have been quite slim on the ground in Victoria.

They haven't been as active as other markets.

I think that's simply because there's been greener pastures and areas with much lower holding costs as well.

And to your point, that has taken away from rental supply as well.

But I think with the federal budget being handed down, we are expecting to see a sharp pullback in investment activity across the board.

I mean, it's almost counterintuitive to what we're told by both the state and federal governments that we need more housing.

It feels like the others are catching up, doesn't it? What impact has the budget had on all this? Because the government keeps saying it's interest rates that have caused the downturn.

Well, it is fair to say the market was already moving into negative movements before the budget was handed down, and it was clearly slowing as early as late last year.

So I think three rate hikes, very unaffordable housing, very low levels of consumer confidence are all at play here.

But then the budget was handed down and that's really just added fuel to the fire as such.

And it's another downside factor, very much a perfect storm when you see this many things influencing the housing market negatively is quite unique.

Normally it's a singularity like higher interest rates or credit tightening or a shock.

At the moment, the market's facing a multitude of downside factors.

Is Treasury wrong?

But is this what is actually happening though? Are first home buyers getting into the market? Are they there on auction day? Because we're hearing that at some auctions not one person shows up.

Yeah, there's a lot of things to unpack from that statement from the minister, I think.

I mean, I don't think investors really had that much of an advantage in the market.

They pay higher mortgage rates.

Their holding costs have gone up substantially with insurances and strata fees and tenancy reform.

So there's probably that's a debate.

But to your point, I don't think first home buyers are coming back into the market.

What do you make of the government's comments when they say things like, oh, this is just a market correction?

You just don't know what's going to happen from, I guess, one month to the next or one period to the next the housing market

well absolutely and people love to look at the short-term movements in housing the reality is most people hold on to their home for around about nine years or so so through that nine-year period you see some ups and downs in a cycle that tends to watch uh wash out the downturns so i think for most people um unless they're thinking about selling or they're running into some sort of financial strife they've had a change in their employment or something like that Most people, this will just be an on-paper shift in the value of their property.

And when they ultimately do sell their home down the track, they'll probably still be realising a profit.

we

actually don't have a forecast on the housing market because to do that, you really need to have a macroeconomic forecast, which is forecasting interest rates and inflation and population growth.

So we're in this really good position at Cotality where we provide a lot of data into people that forecast the market.

So you find most of the banking sector economists are forecasting somewhere between about a 6% to 8% drop in Melbourne housing prices.

That might be a little bit conservative given how fast we're seeing values falling at the moment, and we're still fairly early in the stage.

You just don't know what's going to happen from, I guess, one month to the next or one period to the next as to how that will affect the housing market.

Well, absolutely.

And people love to look at the short-term movements in housing.

The reality is most people hold onto their home for around about nine years or so.

So through that nine-year period, you see some ups and downs in a cycle that tends to wash out the downturns.

So I think for most people, unless they're thinking about selling or they're running into some sort of financial strife, they've had a change in their employment or something like that, most people, this will just be an on-paper shift in the value of their property.

And when they ultimately do sell their home down the track, they'll probably still be realizing a profit.

In other words, what's the methodology for that?

Is it new builds? Is it old established homes in certain suburbs? Is it impacting one area more than the other?

Well, we're definitely seeing weaker conditions around that middle to upper end of the market.

I think this is where some of the just the interest rate sensitivity is and some of the serviceability challenges.

And again, this isn't something new.

We have been seeing that sort of upper quartile or the more expensive end of the market has generally been showing a weaker outcome over the past 12 months or so, even when values are rising.

So, if you look at some of the more outer fringes of Melbourne, getting out towards areas like Casey or the outer fringes of Wyndham and Melton and Hume, that's generally where we're still seeing prices rising.

There's a bit of friction between different types of buyers in the market, but you'd have to think with investors, what we're expecting investors will probably pull back pretty sharply with the budget hand down.

Those big lines that we see around Melbourne, rent prices going up?

Is it new builds? Is it old established homes in certain suburbs? Is it impacting one area more than the other?

Well, we're definitely seeing weaker conditions around that middle to upper end of the market.

I think this is where some of the just the interest rate sensitivity is and some of the serviceability challenges.

And again, this isn't something new.

We have been seeing that sort of upper quartile or the more expensive end of the market has generally been showing a weaker outcome over the past 12 months or so, even when values are rising.

So, if you look at some of the more outer fringes of Melbourne, getting out towards areas like Casey or the outer fringes of Wyndham and Melton and Hume, that's generally where we're still seeing prices rising.

There's a bit of friction between different types of buyers in the market, but you'd have to think with investors, what we're expecting investors will probably pull back pretty sharply with the budget hand down.

Those big lines that we see around Melbourne, rent prices going up?

So what does this say about the way buyers and sellers are feeling and perhaps the changing selling techniques?

Well, to see nearly a quarter of auctions withdrawn, these are auctions that were scheduled that simply didn't go ahead, probably suggests that a lot more vendors are now not getting enough registered bidders for the auction to be successful.

So they're pulling the auction from market and they're not rescheduling it, which of course counts as a negative result in our methodology.

And the fact that we're seeing a lot more auctions selling ahead of going under the hammer as well, I think also speaks to a lack of vendor confidence.

So I think for a lot of people selling their property at the moment, if they get an offer that looks reasonable ahead of the auction, they're simply not willing to test the market under true auction conditions and they're going ahead with that sale.

I think it really does speak to vendor confidence and the fact that we're seeing buyers becoming very much in the driver's seat now.

To what extent is it different or similar across the country? uh it is quite different i mean the two major auction markets are sydney and melbourne and that's where we see most of the auctions being held uh sydney had a 47 clearance rate over the weekend melbourne was at 50 go to somewhere like brisbane and about 15 to 20 of homes are taken to market by auction so it's not quite as much of an auction culture the clearance rate was 33 in brisbane there was only about 16 auctions in Perth.

So combined what we're seeing, and I know Cotality puts out property price numbers on the first of the month, but how likely is this to flow through to property price growth or lack thereof now?

I know I'm going to ask you a difficult question first, but, I mean, how far could this drop go in the next 12 months?

Well, yeah, it is a difficult question and thanks for leading in with that one.

Maybe I can give you a bit of a retrospective.

So if you go back to the last time Sydney went through a significant housing downturn, it was 2017 to 19.

So you might remember that period.

It was coming after a pretty decent run of growth as well.

But then we saw all this credit tightening.

And so, yeah, first-home buyers might be no better or no worse off, but their parents and grandparents, their main asset is plummeting in value at the same time.