How rate rises are sapping demand for new housing

Soaring interest rates and the rising cost of living are sapping demand for new housing, with land sales to would-be homebuyers across Melbourne and Geelong slumping by 6 per cent in the third quarter.

The northern growth corridor was the worst-performing area, with third-quarter sales plunging more than 11 per cent to just 664 lots, according to research by RPM Research, Data & Insights.

Land sales to would-be homebuyers across Melbourne slumped by 6 per cent in the third quarter.

Developers are attempting to stimulate the market’s appetite with discounts of 5 per cent to 10 per cent off land sticker prices, but with little success.

Many builders are also offering price cuts on new homes, which, combined with developer cuts, are creating savings for homebuyers of up $50,000.

Reserve Bank governor Michelle Bullock says more rate increases may be needed.Credit: Oscar Colman

However, the average time lots spend on the market still rose to five months – a three-year high.

The third-quarter tumble comes after Melbourne-wide sales rose 13 per cent from the previous quarter, fuelling hopes of a market recovery.

However, future demand is likely to remain subdued due to shrinking mortgage serviceability constraints, RPM’s national managing director project marketing Luke Kelly said. Rising rates have pushed down borrowing capacity for would-be homeowners by 30 per cent.

“There is substantial unsold developer stock on market, and the numbers continue to grow. This, coupled with existing stock from previous buyers selling land they can no longer build on due to difficulties in obtaining finance for construction, has kept lot prices in check,” Kelly said.

It appears the June quarter numbers may have been an aberration, and not a sign of a market recovery, Kelly said.

Melbourne’s median lot price rose by 1 per cent to a record of $389,000 in the quarter, with the median lot sizes falling 1.3 per cent to 354 square metres. Just 1538 lots were released in the period, down 17 per cent on the previous quarter.

Western growth corridor sales fell by 6 per cent to 765 lots – a 33 per cent drop from the same quarter last year.

The south-east was the best performer, with sales increasing 1 per cent to 457 lots, mostly in Casey. The median lot price – the most expensive of all the corridors – fell by 1 per cent to $435,000, with first-home buyers accounting for just over half of all buyers.

Still, Kelly says there remain buyers in the market. “Buyers still in a financial position to do so are capitalising on incentives,” he said. “Some may not settle on their lot for 12 to 18 months, when the interest-rate cycle may have turned”, he said.

On Tuesday, the Reserve Bank pushed up the official cash rate by a quarter of a percentage point to a 12-year high of 4.35 per cent, as it continues to battle stubbornly high inflation.

If you have a $600,000 mortgage, the monthly repayments will have climbed by more than $1500 – or $18,000 a year.

The latest move brought borrowing costs to their highest level since January 2011, marking the 13th rate rise since May 2022, as inflation proves more persistent than expected a few months ago.

The bank has lifted its forecasts, predicting inflation – now at 5.4 per cent – would still be at 4.5 per cent by year’s end, and at 3.5 per cent by the end of 2024.

New Reserve Bank governor Michelle Bullock said further rate tightening may be needed to bring inflation back to the bank’s target range of 2 per cent to 3 per cent.