Analysts say national home values are likely on the verge of reaching the top of their cycle. But in order to pick the peak, there are some key signs to seek out on the housing horizon.
Picking the market peak is fast becoming Australia’s favourite dinner party conversation.
Ever since national house prices started their extraordinary mid-pandemic boom, expert and amateur property punters have been predicting everything from a “slow down” to a “bursting bubble”.
After an exceptional 22.1 per cent annual surge — the likes of which haven’t been seen since the 1980s — analysts say national home values are likely on the verge of reaching the top of their current cycle.
CoreLogic’s Research director Tim Lawless highlighted this week that in order to pick the peak, there are some key signs to seek out on the housing horizon.
“Yet as the rate of dwelling value appreciation slows, capital city and broad ‘rest of state’ markets are yet to peak, causing plenty of speculation about whether this will occur in 2022 and mark the start of a downturn,” he wrote.
Clues a peak is approaching
Before experts call a peak, they look for a consistent trend in negative monthly house price movements.
“To date, the quarterly trend remains positive across the major regions, with the only exception being Darwin houses, which is the only capital city housing sector to record a negative quarterly change,” Mr Lawless said.
He added there are a lot of moving parts to determining a market peak, including policy-related factors such as interest rates and credit availability, market impacts like supply and affordability, plus economic aspects, namely labour market conditions and wages growth.
The CoreLogic researcher added that some other signs to look out for include rising supply, affordability constraints, weakening auction clearance rates and softening vendor metrics such as longer days on market and larger levels of discounting.
Ray White’s chief economist, Nerida Conisbee, said even if the peak is yet to hit in many markets, bumper growth is likely behind us.
“What’s certain is it’s unlikely we will see price growth anywhere near what we saw in 2021. Price growth or declines, however, will be highly variable depending on where you are,” she explained.
“Even with the best information, it’s difficult to time a peak and trough. Having said that, buying at the peak generally leads to price growth over a longer time period – even if prices stabilise or decline immediately following the peak.
As an example, house prices in Sydney bottomed out in February 2009 following the Global Financial Crisis, but by October 2009 they were again exceeding their pre-GFC peak.
It can be a very tight window between the trough and when prices surge again,” she said.
A perceived real estate rollercoaster
With so much talk of peaks and troughs, Ms Conisbee said uninitiated property followers could be led to believe local real estate is a wild ride.
“I think there’s a view Australian house prices boom and bust a lot. The reality is that in bigger cities we tend to see surges in pricing, followed by either slight declines or flat pricing over a prolonged period,” she said.
Smaller towns and cities experience more highs and lows, she said.
“They’re more likely to see far more variability in pricing, particularly if they’re reliant on a single industry. Mining towns, for example, tend to follow the commodities cycle. Places like Gold Coast were boom/bust locations, driven primarily by tourism, but have become more diverse economies over time and are now more stable,” she added
Peak prices versus peak rate of growth
While the data is yet to show which markets have hit their peak price, the rate – or speed – at which those prices are rising appears to have reached a ceiling.
“Although we can’t see any evidence that specific housing markets have peaked, it is clear that most markets have moved through a peak rate of growth. We saw most of the capitals moved through a peak rate of growth around March last year,” Mr Lawless wrote.
He suggested Australia’s largest markets would peak, for the current cycle, in 2022.
“We could see our two biggest capital city markets Sydney and Melbourne hit their peak later this year, although the timing is highly uncertain and depends on a broad range of influences,” he said.
Ms Conisbee said both Sydney and Melbourne are the most sensitive markets to interest rate changes and financial intervention.
“Finance restrictions put in place in November were pretty mild and although there is a lot of talk of an interest-rate increase, at this stage it still seems unlikely to happen in 2022. Anecdotally however, there does seem to have been a shift in sentiment.
In Sydney and Melbourne there was an increase in days on market over the second half of 2021, suggesting a mismatch between what buyers are wanting to pay and what sellers are after,” she said.
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“Very different conditions are occurring elsewhere in Australia and there doesn’t really seem to be too much of a let-up in momentum. Southeast Queensland is continuing to benefit from population and money moving from Melbourne and Sydney. We are also continuing to see strength in smaller cities like Canberra, Adelaide and Hobart,” she added.
What happens post-peak
It’s one thing to pick a market’s peak, but what happens after that key point in the cycle is also significant.
“Once a market peaks, the typical trend is that values will experience a period of decline. The duration and severity of the decline is dependent on a broad range of both macro and micro factors,” Mr Lawless said.
Bargain hunting buyers might be waiting for a crash, but historically that’s not what happens in Australia, he said.
“Since the late 1980s, Australia has had national downturns that have ranged in severity. The most recent peak to tough decline was a 8.4 per cent drop during 2017 to 19 downturn.”
According to Ms Conisbee, buyers should be focused on the big picture rather than getting distracted by trying to pick outside a peak.
“Always consider property as a long-term investment and the timing of when you buy becomes less important. What is important is that you buy within your budget, and keep in mind that interest rates will increase in coming years.”