Key Takeaways:
- Rising interest rates are causing a housing crash in Australia.
- Sydney and Melbourne Home Index Values have dropped notably this year.
- The housing looks no good, with an additional 14% decline expected in 2023.
Raising interest rates can be a two-edged sword. Central banks raise rates to curb inflation. However, those increases squeeze family budgets. Families are struggling to pay monthly bills with soaring food and gas prices worldwide. Case and point – the Australian housing market.
Australia’s inflation rate was 6.1% this past summer.
The Reserve Bank of Australia (RBA) has aggressively raised rates this year by 225bps (basis points) to a still-low rate of 1.85%. One would think a housing market would flourish in this environment, but not the case here. Simply put, Australia’s housing crash is worsening.
Sydney and Melbourne are the nation’s largest cities, with slightly over 5,000,000 residents. In Sydney, the Home Value Index has fallen 7.4% this year. Melbourne’s HVI has dropped by 3.8% in the last three months.
A Housing Index measures the value of housing movements overtime periods and in different parts of the country. For example, in Sydney, home sales fell over 35% during the most recently reported three-month period; Melbourne experienced a 16% drop during the same period.
Reasons for housing crash in Australia
The primary reasons for the housing crash are high household debt, the high home price-to-income ratio, and an end to previous low-interest rates—the more supply of homes on the market, the lower the values. With so many unsold homes at this time, the market is oversaturated.
Some banks are forecasting a decline of 20%. For example, real estate giant Goodman Group (GMG) has lost 34% of its value this year.
The real estate outlook now
National Australia Bank, the 21st largest bank in the world, is expecting a 14% decline in housing prices in 2023; rising interest rates are the key reason. In addition, Australia is experiencing supply chain and worker problems amid the housing crash crisis.
If the RBA raises the policy rate to 4%, this will double interest rate payments as they stand today. Mortgage repayments will hit record highs compared to incomes, resulting in a 20% drop in near-term prices. Financial insecurity in Australia is excessively high at the moment.
