2022 Sydney Property Market Wrap

December 2022

As 2022 draws to a close, we look back on the year that was in the Australian property market.

Coming off an incredible 2021, where we witnessed street records, suburb records, regional records, lifestyle property records and rural records all over Australia, spurred on by record low interest rates, tight supply, huge demand, increased wealth and a belief rates weren’t going to rise until 2024.

As we rolled into 2022, it looked like it would be relatively smooth sailing for the property market, albeit at a much slower pace due to tighter borrowing requirements introduced in Q4 2021.

2022 saw us coming out of the Covid lockdowns, the world was slowly opening and the rain on the East Coast of Australia kept on coming. Unfortunately, they weren’t the only storm clouds on the horizon. By February the sentiment started to change.

Russia had invaded Ukraine, everyone was talking about ‘supply chain’ issues, the cost of energy and the cost of living kept rising and ‘inflation’ had reared its ugly head. The once in a generation property boom appeared to be over. Covid took a back seat and real-world economic problems and the war in Ukraine took centre stage.

In May, the RBA raised the official cash rate by 25 basis points. This was 2 years earlier than the RBA predicted and they continued to raise rates at every meeting throughout the remainder of 2022 bringing the cash rate to 10 a year high of  3.10%, marking the largest rate tightening cycle since the early 2000s at 300 basis points.

A cash rate of 3.1% is a 10 year high. The increase follows signalling from the RBA it is committed to tackling the “scourge” of inflation, which has been shown to create lasting, detrimental effects on unemployment if not addressed with a strong monetary policy response.

Successive interest rate rises, surging inflation, low consumer sentiment and deteriorating affordability has driven a shift in Australia’s 2022 housing market performance.

Over the year to November 2022, national housing values fell -3.2%, driven by an annual decline in capital city dwelling values of - 5.2%. The estimated total value of residential real estate decreased from $9.6 trillion in December 2021 to $9.4 trillion in November 2022. Estimated annual sales declined -13.3% compared to the year to November 2021, with approximately 535,000 homes sold nationally.

The driving force for weaker value growth in 2022 was rising interest rates. Several other factors contributed to weaker housing market performance over the year, including worsening housing affordability from the perspective of mortgage serviceability and higher rents, and lower consumer sentiment. Persistently high inflation put additional pressure on household budgets, making it harder for first-time home buyers to save a deposit.

A reduction in buyer demand saw seller negotiating power dwindle, leading to larger vendor discounting rates and increased days on market. Off the back of solid capital gains in 2021, CoreLogic's home value index rose by 3.0% between December 2021 and April 2022. Although positive, this was a significant deceleration from the growth rates recorded at the cyclical peak. The downward trajectory intensified on the 4th of May when the RBA announced a 25-basis point rise in the cash rate (the first rate increase in more than 11 years), pushing national dwelling values down and ending the 19-month trough to peak growth cycle (28.6%).

Although values are continuing to trend lower, the rate of decline has been consistently moderating since the national index dropped by -1.6% in August.

The easing in the rate of decline is mostly emanating from the Sydney and Melbourne markets. Three months ago, Sydney housing values were falling at the monthly rate of -2.3%. That has now reduced by a full percentage point to a decline of -1.3% in November. 

One of the distinctive features of capital growth in 2022 was a slowdown in the pace of decline toward the end of the year. National value falls eased to -1.0% in November, following the steep monthly falls of -1.6% in August.

We are starting to see the initial uncertainty around buying in a higher interest rate environment wearing off, while consistently low stock levels have contributed to this trend towards smaller value falls. However, it’s fair to say housing risk remains skewed to the downside while interest rates are still rising and household balance sheets become more thinly stretched.

There is still the possibility that the pace of declines could reaccelerate, especially if the current rate hiking cycle persists longer than expected. Next year will be a particular test of serviceability and housing market stability, as the record-low fixed rate terms secured in 2021 start to expire.

Looking closer at the Sydney market, Sydney remains the only city where housing values have fallen by more than 10% from their peak. Through the upswing, Sydney values increased by 27.7% before peaking in January 2022. Despite the sharp fall in values through the downturn to date (-11.4%) from the peak in Jan 2022, Sydney home values remain 10.3% above pre-COVID levels (March 2020).

Due to a weaker upswing, Melbourne values are only 2.8% above where they were at the onset of COVID.  If housing values continue to fall at the current pace of -0.8% month-on-month, Melbourne’s dwelling values could fall to pre-COVID levels by March next year.

Most of the other capital city and broad rest-of-state regions are still recording dwelling values at least 25% above March 2020 levels.

Let’s look a bit closer at some key market indicators:

Fixed Loans Expire: A lift in fixed mortgage rate refinancing activity from Q2 next year adds to the downside risk of higher mortgage distress. The RBA recently estimated around 35% of outstanding housing credit was on fixed term rates, which is higher than normal; historically around 20% of home loans would be on fixed term rates. Further, the RBA expects about two thirds of these loan terms will expire by the end of 2023, with borrowers facing a 3-4% rise in their mortgage rate.

Housing Supply Down: Persistently low inventory is helping to balance out the slump in housing demand. With advertised stock levels well below average across most markets, there is no evidence of an oversupply of homes available to purchase.
Over the four weeks ending November 27, the flow of new capital city listings was -30.8% lower than a year ago and -14.2% below the previous five-year average. Across the capitals, total listings haven’t been this low at this time of the year since 2010, and regional listings are at their lowest level since 2007. This is a key factor offsetting the negative impact of higher interest rates and low consumer sentiment. Every capital city apart from Hobart is recording total advertised stock levels below the previous five-year average.

Rental Market Tight: Rental markets around Australia remain extremely tight, with vacancy rates holding around 1% or lower in most regions. Vacancy rates have been driven lower by a combination of low rental supply against a backdrop of rising rental demand due to the strong rebound in net overseas migration. The number of capital city homes advertised for rent reached a decade low through November and regional rental ads have not been this low since 2009. At the same time, net overseas migration has bounced back rapidly, reaching record highs in some states.

Let’s look at what is happening in different segments of the Sydney property market

High End – Holding Strong: The top end of the market $15 million-plus is not as interest rate sensitive and is being held up by a chronic lack of stock and over supply of buyers. The top 20 house and apartment sales in Sydney have totalled about $870 million, and over 50 sales of more than $20 million were recorded across Sydney, topping last year’s boom-time bonanza.
2022’s top sale price was $130 million for the Point Piper mansion, Uig Lodge purchased by Scott Farquhar. We also saw $62.75 million for the Vaucluse mansion Ganeden, followed closely by a $60 million sale at 3 Lindsay Ave, Darling Point.
The top sale price for an apartment was $60 million paid for the ANZ Tower penthouse apartment of John Boyd by Ian Malouf.   Malouf also set a new Palm Beach record of $40 million after recently exchanging on Anakela, a 1,948 sqm luxury waterfront property on Iluka Rd.

Mid-Range – Moderate Softening: Higher interest rates are affecting borrowing capacity in the mid-range market. We are seeing a softening of family homes in the $2-$4 million range in the -10-15% range and this is starting to creep into the $4-$7 million range especially for Tier II properties.

Lower End – Greatest Softening: The lower end of the market in the sub- $2 million range has  come under pressure with a softening of 10-20%. In this market we have seen increased vendor discounting and days on market. Buyers are being more cautious and definitely more patient.  As the RBA eyes more interest rate rises this end of the market will bear the brunt of the price declines.

What are we expecting for 2023?

The trajectory of interest rates remains the most important factor for housing market conditions. We believe the cash rate will rise to around 3.6% by Q2 2023 and on the back of this we expect Sydney property prices to continue to soften in the first half of 2023 especially in the lower to middle range.

In the second half of 2023 mortgage serviceability risk will start to impact the market as a large number of homeowners are rolling out of record-low fixed mortgage rates through the second half of the year.

The higher end of the market is less interest rate sensitive, and we need to see more stock for this market to have any significant softening. The chronic lack of stock is keeping a floor under this market.

We also expect lifestyle properties to continue to soften in areas such as the Southern Highlands and beachside holiday homes as more and more Australians get back to travelling overseas.

Stephen Smith
Principal & Buyers Agent