Record falls for Sydney and Melbourne housing in 2022 - but prices remain above pre-Covid levels

Sydney, Melbourne and Hobart posted record annual falls in property prices in 2022 as higher interest rates sapped demand and amounted to the largest national decline since the global financial crisis, industry analysts say.

However, rent increases were "virtually off the charts" rising an average of 10.2% nationally.

Sydney prices for dwellings - houses and apartments - shrank 12.1% last year, or more than double the 5.3% average national drop, according to data firm CoreLogic. But prices remained more than 8% higher than pre-Covid levels, with the median price holding just above the $1m mark.

Melbourne's 8.1% slide in average prices was the largest fall in a single calendar year in the data used by CoreLogic, which goes back to the 1980s. Prices remain above 2020 levels but those gains are "looking precarious", CoreLogic said, with median prices about 1.5% above pre-Covid levels at over $750,000.

The 6.9% decline in prices recorded in Hobart in 2022 was also a record, but made only a dent in the Covid-era rise which saw home prices increase by more than a third since March 2020.

Prices in Brisbane kept rising until June but have since dropped 9.4%. It left prices in the Queensland capital up about 1.1% overall.

Adelaide's housing peak came in July and the 1.3% reduction since then barely eroded the 44.7% gain through the upswing, CoreLogic said.

In December alone, home prices dropped 1.1% nationally, with the monthly drop accelerating in five of the eight state or federal capitals. Despite that result, research director at CoreLogic, Tim Lawless, said there were signs price declines may be coming to an end.

"We probably will find housing markets broadly [hitting] a trough either through the first quarter of the year, or if not, then through the first half," Lawless said.

Most economists are forecasting the Reserve Bank only has a couple of interest rate rises to come in 2023. The central bank lifted its cash rate by three full percentage points in 2022 to 3.1% and investors predict a peak near 4% later this year.

Another pointer to a plateau in prices may be that the top end of the housing market in Sydney, which often serves as a market barometer, has slowed its descent.

"Upper quartile house values actually fell at a slower pace than values across the lower quartile and broad middle of the market through the final quarter of the year," Lawless said. "It's a pretty good hint that more broadly, the market will follow up."

PropTrack, another data provider, also reported an annual drop in home values across 2022, albeit a smaller one at 2.3%, or 4.75% below their peak. The firm, part of the REA Group, also observed some moderation lately in the rate of price falls.

Anne Flaherty, a PropTrack economist said the biggest declines came after June when the RBA lifted the cash rate for four successive bouts of 50 basis points. The pullback to monthly hikes of 25 basis points from October helped explain some of the tapering of price declines, she said.

By PropTrack's numbers, average property prices remain 23% higher than pre-pandemic levels in capital cities, and as much as 50% higher in some regional areas.

Population growth due to an increase in migration and an end to interest rate hikes should "help to put a floor under how our prices can fall," Flaherty said.

Higher official interest rates since May have effectively slashed the borrowing capacity of average buyers by about 25% compared with a 5% drop in prices, making it harder to enter the market, she said.

Renters, who make up about a third of the market, can take little solace. CoreLogic's Lawless said rents rose on average 10.2% nationally last year, a record increase that was "virtually off the charts", including a 0.6% increase in December. Typical years might see 2%-5% gains.

Rent increases were smallest in the ACT, where they rose 4%, compared with 15.5% in Sydney. But it is slowing: the national pace of growth for rent increases peaked at 3% in the first half of the year and had slowed to 2% by the final quarter of 2022, CoreLogic said.

Lawless said the slowdown in rent increases reflected neither a drop in demand nor an increase in supply. Instead, he said it was more likely to a sign of "renters hitting an affordability ceiling and desperately looking ways for ways to minimise their rents", either by shifting from houses to units, or adding more tenants to the same address.

Government efforts to build public housing or reward build-to-rent dwellings are unlikely to have much effect before 2024 at the earliest, he said.

Rental vacancies at the end of 2022 averaged just 1.2% across allcapital cities, with lows of 0.4% in Adelaide and 0.6% in Perth.

"I'd be surprised if vacancy rates could move any lower than what they are at the moment," Lawless said.