How high can house prices rise?

The median house in Sydney will now set you back almost $1.5 million, and for that budget, don’t expect to live very close to the CBD. In Melbourne, it’s nearly $1.04 million, and in Canberra, $1.07 million, the latest Domain House Price Report for the September quarter found. The capital city average is nudging $1 million.

The frenzied bidding seen in autumn is largely over, but don’t expect to get a bargain – property prices look set to edge even higher from here.

The pace of growth is key. Early this year prices were rising at a super-fast pace as buyers took advantage of interest rate cuts to borrow more money and buy their first home or a bigger family home. The huge budgets in play at auctions sent prices soaring and left underbidders shocked.

Interest rates can’t go much lower, so don’t expect another similar boost to borrowing power. Indeed, the bank regulator recently trimmed the maximum amount buyers can borrow, although it’s a slight change that only affects the small number of people who borrow to the limit.

But with more buyers than sellers, expect prices to keep going up for now, just not at the same breakneck pace and not for every home.

That is, we’ve probably passed peak price growth, but we’re not yet at peak prices. Westpac expects property prices to rise 8 per cent during 2022 and finish the year flat, senior economist Matthew Hassan said.

It’s a clear contrast to the past 12 months. Sydney houses are up 30.4 per cent in the year to September, on Domain figures, and 9.5 per cent for units, while even the world’s most locked-down city, Melbourne, recorded 16.8 per cent house price growth and 6.1 per cent for units. Houses in smaller cities have spiralled up, with Canberra up 32.4 per cent and Hobart up 31.9 per cent.

“It was absolutely rampaging price gains in the first quarter, and it was across the board,” Mr Hassan said. “That’s pretty much impossible to sustain.”

It wasn’t only about the Delta-variant COVID outbreaks (and there’s an argument that lockdowns actually push up prices as remote workers buy bigger houses with home offices).

Prices are getting so high that affordability starts to be a problem, he said.

But they’re not finished yet. If prices were peaking, Mr Hassan would expect consumer sentiment surveys to show a drop in price expectations, which is not happening. Another warning sign would be a drop in auction clearance rates to about the 50 per cent mark and a lot of auctions withdrawn, but recent auction clearance rates of about 80 per cent are “a million miles away from that”, he said.

Commonwealth Bank head of Australian economics Gareth Aird adds to that list a drop in the volume of new home lending, which could signal a peak but hasn’t happened yet.

Although the pace of price growth has peaked, that growth is still quite strong and enough to concern the regulator, he said.

Sydney house prices still rose 4.6 per cent in three months, it’s just that we’re comparing it to the March quarter, when the jump was twice as much.

The CBA expects property prices to rise 7 per cent next year, and Mr Aird said he thought it unlikely the bank regulator would try to push house prices down or increase interest rates for existing borrowers.

“The higher house prices get relative to incomes, that’s when affordability constraints kick in,” he said. “For prices to peak and start slowing you generally need a circuit breaker which is interest rates … we don’t think the Reserve Bank is raising next year.”

Although the Bank of Mum and Dad is active, affordability constraints are front of mind. A 20 per cent deposit on a Sydney house is now the equivalent of 13,628 cafe breakfasts, and in Melbourne it’s 9436.

Domain chief of research and economics Nicola Powell said the capital cities are still sellers’ markets and listings remain tight, although the peak rate of price growth has passed.

The amount of total stock on the market is lifting – only slightly – but it shows listings are starting to come onto the market faster than they are being sold, which would keep a lid on the pace of price growth, she said.

“A big element of this is affordability, that is feeding into this pace of growth,” Dr Powell said. “First-home buyers are facing such headwinds in terms of getting into the market. For some buyers, the leap to upsizing has just become too great.”

She said she expected another few quarters of price growth, at a more moderate pace.

The unknown is whether it will get harder again to borrow money, such as limits on taking on debt of more than six times incomes, which could take more heat out of the market.

On the ground, buyers and sellers are starting to see a split between the best properties and the rest.

In a boom, buyers with a fear of missing out will pay huge sums for houses on noisy main roads or with structural issues. Now, not quite as much.

“A-grade stock – and that’s what suits the largest demographic and is still hot out there – is all going very, very well,” PK Property managing director Peter Kelaher said. “C-grade stock is not going well at all.”

The Sydney-based buyer’s advocate said that now, several weeks post-lockdown, locals are booking holidays and getting on with their life rather than focusing on buying a new home.

“The urgency has come out of the market,” he said.

Melbourne emerged more recently and did not run as hard while private inspections were banned during the depth of lockdown. Buyer’s advocate David Morrell is seeing a post-lockdown rush, estimating some homes in affluent areas have jumped 5 to 10 per cent in price in the last six weeks. Inspection rules were relaxed before lockdown ended.

“It’s certainly come out hard, a lot harder than people think, and it’s caught everybody a bit by surprise,” he said, adding auctions of family homes in top neighbourhoods are soaring well over expectations.

But not everything is selling.

“There are still lemons out there that aren’t selling,” he said. “Your unit market is still very soft.”

He insisted buyers had no need to get caught up in the frenzy.

“You don’t need to panic and buy a second-rate property – that’s something we’re really saying to people.”

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