Property market discounting in evidence in Sydney and Melbourne

The two largest cities have led the housing market downturn phase of the cycle.

Cooler housing market conditions

The most substantial housing market discounting is taking place in Sydney and Melbourne.

While housing sentiment and transaction volumes have slowed across much of the country, the most significant discounts to date have been seen for detached homes in Sydney, and to a lesser extent Melbourne.

The price declines from the absolute market peak in the fourth quarter of 2021 have been most pronounced in the upper price quartile of the market, particularly for houses in Sydney.

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In October and November last year, open homes were very busy for the summer selling season and most auctions saw multiple bidders in action.

Now, open homes are considerably quieter and, the majority of Sydney auction campaigns either end in the property being withdrawn from the market or passed in at the auction to be negotiated upon thereafter.

We have seen examples of properties selling for 10 to 15 per cent less than would have been achieved at the peak of the market.

Sentiment is cooler in the lower price brackets too, but stock listing levels are still comparatively low, and discounts in the lower price brackets have generally been more modest to date.

Market downturn phase

The market downturn phase of the cycle is likely to continue for the remainder of the calendar year and into early 2023.

With headline inflation expected to rise to 6 to 7 per cent in the second half of 2022, consumer and housing market sentiment is naturally going to be very cautious, with many borrowers having no significant experience with interest rate hikes before.

The good news for borrowers is that looking further ahead, inflation expectations are easing, fuel prices are now on their way back down, and benchmark bond yields in Australia are around 60 basis points off their highs.

Figure 1 – Australia Bond Yields

We expect the housing market to bottom out soon after Australia Day weekend in the new year, as consumers gain confidence that the tightening cycle will soon come to an end, and with mortgage rates still at relatively low levels in absolute and historic terms.

This should leave buyers a comfortable 6-month window of opportunity to buy well and negotiate hard in Sydney and Melbourne, potentially picking up a quality asset at a reasonable discount.

Stamp duty reform

Forthcoming stamp duty reform in New South Wales would lead to the market recovery being driven from the lower end of the market.

If first-home buyers in the price brackets under $1.5 million have the opportunity to waive stamp duty then this might reduce the deposit and closing cost requirement by 5 per cent and could lead to a rush of buyers getting into the market, even if it means borrowing from ‘the bank of Mum and Dad’ as it is known colloquially.

Paradoxically, this overdue tax reform being flagged so far in advance could lead to investors buying in the same price brackets ahead of the new year, meaning that the affordability advantage is arbitraged away quite quickly.

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