Signs Australia’s Housing Boom is Far From Over

Average Australian property market.

Are declining property values the nail in the coffin for Australia’s property boom?


The current price fall is the first stage of a skydive: controlled, intentional, and with safeguards in place.

The initial drop is fast and exhilarating. Property values have fallen 8.6% since the start of the RBA’s rate hikes in May. But things won’t last. Without any structural shakeups, the Aussie property market will deploy its parachute and slow its fall until it eventually hits the ground. Softly.

So why is there so much talk of financial doom, and what should investors be thinking?

The main cause for concern is that declining property values threaten to pop our debt balloons.

During the pandemic, Australians inflated their debt balloons with heady enthusiasm.

We entered the pandemic with $2 trillion in debt. Just two and a half years later, the debt balloon had swelled to nearly $2.3 trillion. A decade of low and declining rates meant finance became more available than ever. The gates to lending Valhalla were wide open, meaning that few people were forced to reconsider their financial decisions.

We did not ask intelligent questions in the years up to and during the pandemic. Like, “is this a wise decision?” Or, “is this property worth what I’m about to pay for?” Instead, we hastily got into expensive loan arrangements. This led the average loan size to jump to over $800,000 from $650,000 before the pandemic in Sydney alone. Furthermore, according to the RBA, household debt as a share of income inflated to a whopping 884%.

This brings us to the risky situation we are in now.

Australians have debt balloons filled to breaking point, terrified of a pin flying through the air and popping them. Australian capital cities’ property values fell 5.3% last year, the largest since the GFC. Corelogic economists predict Melbourne will lose all of its pandemic gains by February.

But there is cause for optimism. We are nearing the turning point for parachute deployment.

Rates are not expected to go much higher and will fall, leaving room for demand to rebound.

No economist has a crystal ball. Their predictions are half financial analysis and half expert guesswork, but still guesswork at the best of times.

Yet they all seem to be reading the same fortune cookie line: the cash rate will not go much higher than 3.6 – 3.85%.

Even then, if we hit the doomsday 3.85%, it will not overturn the ship. Australians have high affordability buffers, and most would be able to weather high rates for many years to come. The employment rate is high, and people with jobs can endure a surprisingly high amount of financial pain.

We’re talking about ‘Adele breakup song’ levels of pain. Our aversion to loss rings true for more than our approach to relationships; we tend to entertain a toxic relationship with our real estate, too, in hopes ‘it will change, it just needs more time, and I need to be patient’ rather than cutting our losses. And when we all believe in something, it sometimes comes true. The property market follows the “Tinkerbell” effect – if we all believe in it, it will happen.

It is important to note that both scenarios leave room for the RBA to raise the cash rate a few more times in 2023. With the CPI rising 7.3% over the year to November, a predicted inflation peak of 8% for December, and consumption staying resilient, another 25 basis point rise seems all but guaranteed. This is the RBA’s ‘you get a car’ moment, but instead of cars, they give away higher loan repayments. How exciting!

Yet the free fall won’t go on forever: we will soon be fumbling for the parachute strings. Rate increases will be followed by cuts in late 2023 and early 2024.

Why the rapid turnaround? Well, the RBA wants to maintain a stable economy and return to ‘normal’ rate settings as soon as possible. It certainly is not out for blood. After it has punished the economy enough to bring consumption down, it will begin its cycle of rate cuts to stimulate growth.

And there is nothing better for house prices than rate cuts. They allow borrowers to sign on to higher-value debt facilities. This lets them attempt to outbid each other for properties with their deeper wallets. In turn, property prices should start rising again says Joseph from Gavel and Page who are professional Sydneys conveyancers.

If prices were to start rising in 2023, the peak-to-trough price fall would be much lower, at around 7% instead of 15-20%. This would dampen the severity of a property downturn and give us the foundation for solid growth into the future. Once we have weathered the challenges of 2023, we will move back to a more stable and predictable property market.

Our next boon is migrants. Australia has always been a hot destination for migrants, keeping property demand high.

Australia has one of the most richly diverse populations in the world, and that isn’t about to change.

As our borders open to migrants and our policy settings become more open, we are in store for a surge of new entrants. This is another major property parachute at our disposal. Migrant demand will slow the property price plunge with a needed demand boost.

The government’s new immigration policy will see up to 300,000 migrants enter the country in 2023. It’s a hit of adrenaline for the property market, and it couldn’t come at a better time. By increasing the number of people demanding property, the price goes up. It is the classic rule of scarcity.

Australian migration boosts the economy.

The increase in short-term occupants will lift rental occupancy rates and quickly boost revenues. Landlords in tourist and study destinations, such as Sydney, Melbourne, and Brisbane, will benefit the most. They will swell with new people looking for places to stay.

Coupled with the high rents currently being charged, landlords stand to make windfall gains that’ll stop the property market from losing too much blood. It also gives another incentive for investment.

Permanent migrants go one step further in boosting the property market. As they want to settle in Australia, they join the buyer pool for houses and units. This will do more for the property market bounceback than our first home buyer grants, delivering thousands of excited new buyers for years to come.

The final part of the skydive can go two ways depending on policy: a slow and controlled descent or an abrupt emergency landing.

The slow and controlled way to lift property prices is financial incentives – like negative gearing.

What does negative gearing do for house prices?

It provides a tax incentive for Aussies to own multiple investment properties, driving up demand for property in desirable locations. When a property is negatively geared, any losses can be deducted against the owner’s income, including if rental returns are lower than interest repayments. This allows investors to access a capital gain on a property in the long term, even if the property is not turning a profit in the short term.

But here is the kicker. Even without negative gearing, house prices would still increase.

It all comes down to a pesky thing called inflation; maybe you’ve heard of it? (Sorry, too soon) Inflation is the process of goods and services becoming more expensive over time. It ensures that the value of money is continually eroded, making things more expensive in dollar terms. $1 earned ten years ago will have a fraction of today’s power. Inflation is a natural part of modern economics. As our wages increase and our quality of life improves, it is only natural that asset prices do too.

So policies like negative gearing do not create the asset price inflation we see. It merely speeds up a phenomenon that would have happened anyway. This should calm our fears that the property boom is over. Once interest rates stop ascending, investment activity will rebound, and house prices will continue their upward march.

On the other hand, if house prices do not return to normal as quickly as the government would like, it will intervene. Think of it like a parent pulling their child mid-tantrum out of a store.

If prices look set to tumble and the property market teeters, the RBA will begin to aggressively lower rates. It understands that most Australians’ wealth is tied up in property (including super) and will not allow this to be erased overnight. This will come alongside expansionary government policy. It will release building grants, first home buyers schemes, and do what it can to throw money at prospective buyers.

It is this inflationary logic which led the NSW government to substitute stamp duty for an annual land tax, which helps first home buyers’ initial deposit go further, to a higher value home.

These measures will lift the demand and keep the property market afloat with higher prices.

Bringing it back to our skydiving analogy, the property market is not falling blindly.

Many structural and policy safeguards protect the Aussie property market from a multi-trillion dollar nosedive. From migration to negative gearing to central banks, the tools at our disposal are far-reaching, and they’ve worked for decades. It has resulted in property taking the crown as Australia’s premier storage medium for wealth. Did you think the government would let a $9 trillion market topple? It wouldn’t be a wise move.

Doomsday reporters’ crucial mistake is seeing property downturns as a crashing plane instead of skydiving with a parachute. In doing so, they frame the free fall as a worst-case scenario instead of a moderated process.

If we take a step back, we can find some welcome perspectives. The free fall is just one part of a much bigger process. One with many protections and stages that will end in a cushioned landing. Our task is to ride out the fall and take it as it comes.

About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.

Falling values aren't the nail in the coffin for Australia's property market. Rather, they are a normal and controlled part of the RBA's monetary policy.
Back to Information Hub
  • Previous:
  • Next: