Sydney house prices post steepest annual fall on record

Sydney house prices have had their steepest annual fall on record, declining 10.9 per cent last year as rising interest rates took a toll on buyer demand and spending power.

Sydney’s median house price fell more than $170,000 to $1,413,658 last year, the latest Domain House Price Report, released on Wednesday, shows.

House prices dropped last year as interest rates soared.Credit: Nikki Short

However, the pace of declines slowed in the December quarter when the median fell 2.1 per cent — three times slower than the previous three months.

House prices are now 11.3 per below their early 2022 peak, but are still 24.2 per cent higher than they were when the market troughed in mid-2020.

Unit prices fell, but at a slower pace, dropping 1.2 per cent to a median of $748,422. Prices fell 6.5 per cent over the year, and are now lower than March 2020.

Domain’s chief of research and economics Dr Nicola Powell said the housing market posted its steepest annual decline on Domain records, which date back to 1993.

While the pace of declines had eased recently, further falls were expected, Powell said.

“Prices are still pulling back … we’ve just moved away from the extreme rate of decline,” Powell said.

“In the September quarter [there] was a shock reaction from the market. We really saw the impact of aggressive rate hikes … reduced borrowing capacity, and [buyers] factoring in future rate hikes.”

Buyers have since adjusted to rising rates, while there had also been a pullback in homes for sale, which helped to moderate price falls, Powell said.

ANZ senior economist Felicity Emmett expected the shift to higher rates for many homeowners would lead to a sharp pullback in consumer spending, rather than a lift in distressed listings, as the high employment rate should limit forced sales.

She has forecast Sydney prices to keep falling and decline 18 per cent from peak to trough, based on expectations the cash rate would peak at 3.85 per cent and hold steady until rate cuts start in late 2024.

“Once the cash rate stabilises, we’ll probably start to see prices level out, and then next year as rates stay the same and incomes rise, we expect that to flow through to moderately higher prices,” she said.

Although prices were falling, there had been no improvement in affordability, Emmett said, as buyers faced increased mortgage costs.

“Our analysis suggests prices would have to fall around 30 per cent ... to offset the impact of those higher interest rates ... so for buyers it’s actually going to be more difficult.”

Commonwealth Bank’s head of Australian economics Gareth Aird said Sydney had the highest property price-to-income ratio, making it more sensitive to rising interest rates.

“Given it went up so much in dollar terms [during the boom] there’s more scope for a correction,” he said.

Aird said buyer sentiment had improved and price declines had slowed as cash rate hikes eased late last year. The strong rental market was also supporting prices, as was the drop in seller activity. Distressed listings remained limited.

Aird expects a peak-to-trough fall of 19 per cent in Sydney and a cash rate peak of 3.35 per cent.

Across the city, Sutherland recorded the largest quarterly house price decline at 6.5 per cent, followed by the North Sydney and Hornsby region (-2.7 per cent) and the outer west and Blue Mountains (-1.7 per cent).

Prices increased marginally or held steady across six regions last quarter, such as the northern beaches and the city and inner south, which already had a large drop in prices.

First home buyers Tristan Chan and Garland Liang will swap their Ryde rental unit for a two-bedroom townhouse in Macquarie Park.

Tristan Chan and Garland Laing are moving out of their rental apartment this week, after purchasing a two-bedroom townhouse in Macquarie Park. Credit: Kate Geraghty

Rising interest rates meant the couple could borrow less than expected, but also meant less competition for homes. They still had to borrow to their maximum to buy in their preferred location, but were mindful of not overextending.

“We had thought we could borrow more, I was a little surprised,” Chan said. “However I think it helped to give us a more realistic budget and … rising interest rates helped us [in a way], because it felt like there were less people out there who were seriously buying.”

Liang added: “We could either go ahead with our borrowing power or back out and wait, but we knew if we waited that there would be a lot of other people waiting to buy a home too.”

The couple will opt to pay the property tax now available to first home buyers in lieu of stamp duty.

Their buyers’ agent Brady Yoshia, of Brady Marcs Buyers Advisory, has seen good buyer interest to start the year, particularly to take advantage of first home buyer assistance schemes in the less competitive market.

Buyers were still having to compromise, despite the price falls, as their borrowing power had fallen faster, she said.

“Across all price points there are still very keen and eager buyers, but the market has just started for the year,” she said.