The slump in Australia's housing market is deepening. As demand falls due to three benchmark rate hikes this year and reduced tax breaks for real estate investors, the decline in home prices is spreading from Sydney and Melbourne to other major cities.
On the 2nd, according to Bloomberg, Australia's July dwellings prices compiled by CoreLogic fell 0.7% from the previous month. It was the biggest monthly drop in 3 years and 7 months since Dec. 2022.
The June decline in dwellings prices was also revised lower from the initial reading. CoreLogic revised June's month-over-month change to a 0.7% drop. As a result, Australian home prices fell 0.7% for two straight months.
By city, home prices in Sydney, Australia's largest city, fell 1.4% in a month, the steepest drop, and Melbourne fell 1.2%. Brisbane and Adelaide, where prices had held up relatively well, fell 0.6% and 0.2%, respectively. Only Perth, Hobart and Darwin saw prices rise.
Gerard Burg, head of research at CoreLogic, said, "The housing market downturn accelerated in July," adding, "The price decline that began in Sydney and Melbourne is spreading to mid-sized major cities."
Experts cite the Reserve Bank of Australia (RBA) raising the benchmark rate three times this year as the biggest reason for falling home prices. When rates rise, interest on mortgage loan payments increases, and the amount that new borrowers can obtain decreases.
The Australian government's move in May to reduce tax benefits for real estate investors also dampened investment demand. On top of that, rising living costs and already high household debt have reduced the number of people looking to buy dwellings.
The gap is also widening between what buyers and sellers consider a fair price. People looking to buy expect prices to fall further and bid lower, while sellers try to hold to existing prices. In major cities, the share of dwellings listed at auction that actually sell has fallen short of half.
As housing transactions weaken, banks' home lending is also declining. New mortgage loan originations at National Australia Bank (NAB) in the second quarter fell 15% from the prior quarter.
However, the total outstanding loan balance for home loans continues to rise. According to the Reserve Bank of Australia, the outstanding loan balance for home loans in June rose 7.5% from the same month a year earlier. Loans to owner-occupiers increased by more than 6%, and loans to real estate investors rose 10.4%. The investor loan growth rate was the highest in about a decade.
Although new borrowing has decreased, the overall debt has grown because Australia's dwellings prices surged for years, prompting households to borrow more.
The shortage of housing supply is also unresolved. With labor and building materials in short supply, and with construction costs and interest rates rising, both the expense and the time required to build new homes have increased. The number of completed dwellings has been declining or stuck at similar levels for years.
According to Australian government statistics, about 205,000 dwellings received building permits in the year through June. That is roughly 35,000 short of the government's annual supply target of 240,000.
Lucinda Jerogin, an economist at Commonwealth Bank of Australia, said, "Building approvals for dwellings have clearly recovered from around 165,000 in mid-2024," but noted, "High interest rates are holding back construction, and supply chain disruptions stemming from the Middle East conflict could push construction costs even higher."