Why Australia's latest housing market downturn largely reflects falling prices in Sydney and Melbourne

State of Origin. Photo: Getty Images
  • Australian home prices fell by 0.5% in the March quarter of 2018.
  • CoreLogic says that was driven by 1.1% decline in the top-end of the market, masking price gains for less expensive property.
  • With Sydney and Melbourne home prices higher than the national average, much of the weakness at the top-end of the market reflects recent declines in these two cities.

As a whole, Australia’s property market is slowing down, cooling rapidly after a strong period of growth.

Affordability constraints in many larger capitals, increased supply of new housing, out-of-cycle mortgage rate increases and tighter restrictions on investor lending have all combined to reverse what appeared to be an ever-upward increase in prices.

However, while the national housing market is now slowing down, some areas are slowing faster than others.

Prices in Sydney have now fallen over the past year, joining Australia’s mining capitals — Perth and Darwin — where prices have been falling for several years.

Melbourne, based on recent price weakness, could join that list in the not-too-distant future.

While prices in those capitals are going backwards on an annualised basis, in many smaller capitals, and specific regional areas, values remain higher than a year ago.

The variances across the country demonstrate why there’s no such thing as an Australian housing market.

Price trends vary from location to location, and by valuation.

Nothing quite demonstrates that last point like the chart below from CoreLogic, revealing annual changes in property prices by market valuation.

Source: CoreLogic

The latest national housing slowdown has been led by the top-end of the market.

“The trends of the past are being repeated with the most expensive properties experiencing the most rapid slowdown in value growth,” says Cameron Kusher, Research Analyst at CoreLogic.

“During the growth phase, it was these same properties that were also recording the highest rate of capital gain.”

Kusher says the divergence in price movements by market valuation were clearly evident in the March quarter of this year.

“National data shows that dwelling values were down by 0.5%, however digging below the surface reveals the modest fall in values was confined to the most expensive quarter of the market,” he says.

“The most affordable properties increased in value by 0.7% compared to a 0.3% increase across the middle market and a 1.1% decline across the most expensive properties.”

Much of that variance by price range can also be explained by recent weakness in the Sydney and Melbourne markets. Not only are they Australia’s largest housing markets, but also home to the vast majority of Australia’s most expensive homes.

That means that what happens in these cities often dictates movements in the top-end of Australia’s property market.

It also suggests that from a broader national perspective, prices in most other locations, regardless of valuations, are still higher than a year ago.

Indeed, even with a patchy price performance in recent months, CoreLogic reported that median home prices in all capitals except for Sydney, Perth and Darwin rose between 1.3% to 13% over the past year.

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