Banks forecast 10% property drop: Is the Australian market crashing?

Chris Bates

Pete Wargent and Chris Bates used this week's episode to test the mood against the data, after weeks of headlines predicting a housing downturn. Wargent, founder of AllenWargent Property Buyers, started with what he's actually seeing on the ground, against what Cotality (formerly CoreLogic) is reporting.

Wargent: We do a fair bit of stuff in New South Wales and we've seen plenty of cases where properties have sold for maybe 10, maybe 15% less than they might have done a year ago. We get all these data series that are sent out by Cotality and other providers, but they're often quite lagged, and they also seem to imply this kind of smooth glide lower, whereas I think in reality Sydney and Melbourne were in a downturn anyway at the start of the year. Cotality have got Sydney and Melbourne house prices down about 4% year to date.

He added that the real story wasn't a steady decline but a sudden step down around Budget time, followed by a quieter patch where deals are still getting done.

Wargent: Since then, well, interesting — that stuff is actually still transacting, albeit more slowly, but vendors and buyers are finding common ground, sales are happening. Haven't really seen much in the way of fire sales, I guess, because unemployment is still under four and a half per cent, so most people still have a job even if the economy's slowing. We've seen some actually surprisingly strong sales over the past week in Sydney, southeast Queensland.

Bates, CEO of mortgage broking firm Alcove, pushed back on the idea that this is a fresh, budget-driven collapse.

Bates: I think everyone's sort of going, "Oh my god, the market's in freefall because Cotality released some data a few weeks ago." But if you fast forward even a month before that — look at what agents were saying in April and May, they were basically talking about 10% declines within that period, because that was a very scary time. You had the war, inflation was through the roof, expectations on interest rates were getting close to 5%. So obviously you're going to see some price falls, and I think this is the issue with the data lag — the news cycle picks up the data and goes, "market's falling," when actually it's already fallen. March was a great time to be buying, that's when peak fear was.

Rental and construction data came next. Cotality's rental index rose half a per cent in June, with annual growth sitting at 5.9% and vacancy rates still low, though Wargent didn't read too much into it.

Wargent: I think there's a couple of things that will likely happen. One is inflation. If you went back to when the Iranian conflict sparked up in February, a lot of analysts were saying oil prices could go well over $140 a barrel. Well, today they're 68. Australia's seen three interest rate hikes since February, and we've now got interest rates that have gone up to combat an oil price shock that is no longer there. The Melbourne Institute's June inflation gauge was minus 0.4% in June, down to 3.9% year on year from 4.4% in May. The other thing — the Australian performance of construction index fell sharply in June, dropping 26.9 points to a reading of 38.1. I don't think I've ever seen a drop like that in a single month. Constructors indicated that the changes to CGT announced in the federal budget had dampened inquiries, reduced orders, and prompted some development and construction firms to reassess their workforce needs.

Bates said the same pressure was showing up directly in developer finance conversations.

Bates: I went for coffee with a mate who's got probably the biggest commercial brokerage in the country, and they do a lot of finance to developers and builders. He basically said when that conflict kicked off in March, it was scary times for them — they saw a huge pullback in appetite for construction finance. We've got this desire with the budget to increase housing supply, but the last thing we probably needed was, you know, prices falling or confidence around buyers reducing. There's issues with settlement risk when you're signing an off-the-plan contract, and it really freezes up the market on top of all the insolvencies developers have been dealing with. I think the banks and investment banks are starting to understand what the risk of this budget actually is — it's not going to be uniform, and that research is now getting into the banks because people are realising it's really anti-investor.

The self-managed super fund lending ban compounded the problem, Wargent said, quoting industry economists Cameron Kusher, previously of REA Group, and Tim Reardon, chief economist at the Housing Industry Association.

Wargent: Self-managed super funds might only be 1% of the housing market turnover, but for a lot of new developments, maybe investors in their super funds are the marginal buyer that helps those projects get out of the ground — take away that buyer and suddenly a lot of those projects are no longer feasible. Cameron's been hearing horrific stories about how much demand for new houses and apartments has pulled back over the past few weeks. And Tim Reardon said buyers of all types have exited the new home building market as they await stability.

From there the conversation turned to the week's two main stories, starting with first home buyers. Early figures from Aussie Home Loans suggested the budget hadn't produced the shift toward first-time buyers that policymakers hoped for.

Wargent: One of the country's largest mortgage brokers says the number of prospective first home buyers applying for loans has plummeted by 20% since Treasurer Jim Chalmers unveiled his controversial budget. The decline in applications for a loan from investors was about 25%. So maybe marginally that ratio of buyers has shifted, but it doesn't seem as though there's anything there to plug the gap.

Bates said that was the opposite of what he expected, and the reason came down to fear rather than fundamentals — a conversation worth having with a mortgage broker for first home buyers before assuming the budget has made things easier.

Bates: What I would say is that new inquiries actually dropped — you'd think it'd be the opposite. I think this is the interesting point: this whole fear around what's happening, first-time buyers going, "I'm not sure about this, I don't know what this means for me." They don't want to catch the falling knife. I think first-time buyers need to be more careful than ever. They just have to avoid the markets where investors have been dominating and pushing prices up in recent years, because all properties aren't equal — and it's not just about a couple of years, it's about the property that's going to suit their life.

Wargent added a practical warning for anyone leaning on the 5% deposit first home buyer scheme to get into a softening pocket of the market.

Wargent: There's a lot of stuff getting listed where, particularly with units, you've seen properties that have had cladding issues, special levies or loans to cover repairs, or just major issues — not A-grade properties. The thing you want to be really careful about is jumping on a property because it's newly listed. When there's not a rising tide to lift all boats, you really do want to avoid picking those up.

The second big story was a fresh look at 30 years of Australian property history, reported by ABC News, which mapped eight peak-to-trough corrections since the mid-1990s.

Wargent: They found that downturns produced an average fall of 2.9% over eight months, and upswings generally lasted more than three years, with average gains of 32.3%. Morgan Stanley have updated their forecast and now predict house prices could fall between five and 10% in this cycle, which it describes as one of the largest price corrections over the past 40 years. A 10% fall in housing prices at the national level would take the index back to where it was at the end of 2024 — call it 18 months of price gains erased. Nicola Powell from Domain said Sydney often serves as the canary in the coal mine, responding first when borrowing conditions and confidence change, before helping lead the recovery.

That raised the obvious question: what's the risk of a five-to-10% correction turning into something bigger, and what happens to first home buyers who used the 5% deposit scheme if negative equity hits?

Bates: I think people are using [the shallow-downturn framing] as a bit of a sales tool. There's interest rates, there's borrowing capacity, but we haven't got this supply shortfall — it's not like there's heaps of listings on the market. I think the issue is the budget's very anti-investor, but it's also massive for home ownership, so it's just going to test the market and really expose assets that are driven too much by the investment market. I think you'll find some areas are really challenged if first-time buyers don't want them, but that doesn't mean the whole market — it's just pockets facing a lot of the brunt.

Wargent agreed that Brisbane, Perth and Adelaide have had such enormous runs that giving back some of the froth is barely a dent.

Wargent: They're all up over 100% since 2019, so you give back 10% of that — is it really a big deal? It's probably only six months of growth.

Two listener questions closed out the episode. The first, from a listener called Expander, asked Bates what structuring principle separates long-term investors who succeed from those who get stuck or over-leveraged.

Bates: I think the first thing is really trying to build a portfolio around your life. If I think about the clients that have done well, often they've gone in the housing market, not the apartment market — they've got themselves a really good asset from a home, and that does a lot of the heavy lifting, growing tax-free. From a structuring point of view, it's really just constantly releasing equity, extending loan terms, building buffers. It's not really been the ones that have done the most — I'd say it's the ones that have done the least. Even up to 2020, the ones with the most properties usually did all right on one or two, maybe a house bought on the Gold Coast 20 years ago, and a lot of their other investments hadn't really moved the dial.

Wargent added that the pattern tends to be one bad property derailing an otherwise sound plan.

Wargent: Usually it's one bad property and then all of a sudden the wheels fall off a bit — the missed opportunity where they bought in a hot market, something that was a bit compromised, and when it cooled off they got hit harder. Sometimes it's just being really patient when you buy. When you actually get into the nitty-gritty of a larger portfolio, maybe a couple of properties have done all the heavy lifting and a lot of the B-grade stuff hasn't done so much.

The second question, from Silent Sales Guy, asked how realistic off-market and pre-market deals are for regular buyers without a buyer's agent. Wargent drew a distinction between genuine off-market sales and pre-market tip-offs.

Wargent: There's two types of property. One is genuine off-market properties that are never intended to be publicly listed and often sell privately, whether to avoid marketing costs or for privacy — you see this in the more prestige areas like the eastern suburbs of Sydney. But we also get a lot of pre-market properties where agents share with their database properties that aren't quite ready to be listed fully yet. If you can get first look at those, that's an advantage. Just because a property's sold off-market doesn't mean it's automatically a good deal — vendors still have very similar expectations, and there can be risks if you don't have as much transparency or as many comparable sales to work with. The main thing is building relationships with the agents in the areas you want to buy, because they're the ones at the cutting edge of the market. There's no shortcuts — you've got to treat it like a part-time job.

Bates agreed agents only open that door to buyers they trust are serious.

Bates: Agents will give you access to pre-markets and off-markets if they really know you're in the market, you're serious, you're pre-approved, you've been to other properties, you've missed out at auction, you've built a relationship with them. If you're not that, then I don't think they'll share it with you, because there's risk involved for them. I think you're going to see some pivots — maybe some lower-cost services pop up that are a bit more like a desktop buyer's agent option — and more coaching for buyers, because not everyone can afford a buyer's agency fee. But I think you've just got to really be on the front foot with the agent, and if they do give you access, give them feedback on it.

Wargent closed with the state of play as it stood: selling prices lower than a year ago in plenty of cases, but things levelling off in recent weeks; rents still rising while construction activity has "basically dropped off a cliff"; and oil prices falling back to earth in a way that should eventually help inflation and mortgage rates, even if the benefit isn't likely to be felt until 2027.