What are the signs that a real estate market has peaked?

“The context of what happened last year with this price spike phenomenon forced prices to plateau,” he said.

“With talk of rate hikes and the Reserve Bank raising interest rates, it’s going to affect what people are willing to pay for a house.”

Many buyers are hesitant to pay more and more for a home.Credit:Joe Armao

Interest rates are rising

Banks have been raising fixed mortgage rates for months, even though the Reserve Bank has yet to raise the cash rate.

Potential buyers faced with the prospect of higher monthly mortgage repayments may choose not to borrow as much, or may not be able to borrow as much, and instead compromise on the type of property or suburb they want. they hoped.

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“Fixed rates have been rising for about nine months,” said AMP Capital chief economist Shane Oliver.

“So you can tick – we’ve seen deteriorating affordability crowding out more buyers, and we’ve seen a move towards higher interest rates at fixed rates.”

Once the cash rate rises, likely later this year or next, many economists expect shrinking homebuyer budgets could drive home prices down.

Dr Oliver said Sydney prices could already be at their peak, or they could rebound this month, but either way the two biggest cities are at least approaching peak prices.

Home buyers’ sentiment weakens

A closely watched gauge of homebuyer sentiment has deteriorated, Westpac senior economist Matthew Hassan said.

Many people doubt that now is the right time to buy a property.

Many people doubt that now is the right time to buy a property.Credit:Eddie Jim

The Westpac-Melbourne Institute’s Consumer Sentiment Index asks if now is a good time to buy a home, offering insight into homeowners’ thoughts on affordability.

“It’s declined sharply over the past year and albeit from a fairly high starting point,” Hassan said. “This indicates a slowdown over the next six months or so.”

He added that investor demand is starting to show more strength than owner-occupiers.

Demand for investor loans is growing faster than homeowner loans.

Demand for investor loans is growing faster than homeowner loans.Credit:Brook Mitchell

Blocking home loan approvals

When a real estate market peaks, economists expect demand for home loans to fall as fewer people try to buy property.

New loan commitments fell last winter during the Delta shutdowns, but have rebounded since November and hit a record high in January, according to ABS figures.

This could suggest that demand will hold up for a bit longer, although lending to investors has risen more strongly than homeownership, which was the driving force behind the last housing boom.

“There are now clearer signs that the homeownership recovery is beginning to peak,” Hassan said. “There are tentative signs that we are moving past.”

Last year, the banking regulator reduced the maximum amount buyers could borrow by asking lenders to ensure that borrowers could repay their loans if interest rates rose by 3 percentage points. The previous guide was 2.5 percentage points. This has reduced the budget of some buyers by around 5-10%.

Auction clearance rates drop

When a real estate market peaks, auction rates typically drop, as a smaller proportion of homes auctioned find buyers.

Clearance rates in Sydney and Melbourne have slipped from their highs of last fall, but are still in positive territory and not yet signaling lower prices.

Auction rates have fallen but remain positive.

Auction rates have fallen but remain positive.Credit:Meredith O’Shea

Last weekend, Sydney had a preliminary clearance rate of 76.3% and Melbourne of 67.2%.

A settlement rate of 70% generally indicates annual price growth of around 10%, while the rate must fall below 60% to be considered a buyers’ market.

But there are signs that sellers are more willing to accept previous offers, a suggestion that they don’t expect strong competition on auction day, and a few are reducing their reserve prices to ensure a sale under the hammer.

Some buyers bid under the hammer, while others bid before the auction.

Some buyers bid under the hammer, while others bid before the auction.Credit:Simon Schluter

“Such high auction clearance rates are normally consistent with prices continuing to rise, but I think what could be happening is that a lot of sellers suspect that we are at the top of the market and that they are therefore just happy to bargain and sell with whatever the auction result ends,” Mr. Aird said.

“Normally it’s a good indicator, but right now it could be sending the wrong signal.”

Government incentives return

Some of the first homebuyer supports were introduced when the pandemic ended and demand from first-time homebuyers plummeted.

The HomeBuilder program set up to support construction jobs during the early days of the pandemic has come to an end.

The HomeBuilder grant has ended.

The HomeBuilder grant has ended.Credit:Paul Rovere

The Federal Home Loan First Deposit Program is still ongoing, and state governments are still offering stamp duty concessions for entry-level properties, although these are becoming more difficult to obtain as prices increase.

Affordability is deteriorating

Property prices have skyrocketed and many buyers cannot afford to pay so much, which is a drag on further price growth.

In 2021, house prices in Sydney jumped 33.1% and units jumped 8.3%, while Melbourne houses rose 18.6% and units jumped 6%, according to figures from Domain .

Even a modest home becomes less affordable.

Even a modest home becomes less affordable.Credit:Paul Rovere

Dr Oliver said a market peak is usually preceded by a period of falling rates of price growth as gains slow – they rarely rise and then stop.

“Invariably this is preceded by a deterioration in accessibility,” he said.

Professions to be corrected

Once interest rates rise, economists expect house prices to fall, but the spike is unlikely to be abrupt or uniform.

“Over the long term, the most usual cycle for house prices is to have a sharp rise followed by a long period of flat prices, perhaps slightly down,” Hassan said.

“It’s more usual to reach a new plateau and have a period of relative stability. It is not a pendulum that we automatically swing into a corrective phase.

Westpac predicts house prices will fall 7% next year and 5% the following year, while the ABC predicts an orderly correction of 8% in 2023 and ANZ predicts a 6% decline in 2023 , all modest declines against the backdrop of recent gains, meaning housing is likely to remain expensive relative to incomes.

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Small capitals may also continue to rise for longer as Sydney and Melbourne lead. And expect to see the most sought-after homes still attract stiff competition at auction, while properties with flaws take longer to find a buyer.

Mr Aird said price cuts can take on their own momentum.

“Once buyers expect prices to go down, they invariably go down, because buyers tend to wait for prices to go down and then they go down,” he said.

Penny D. Jackson