Sydney property prices set to fall in 2022 as regulators clamp down on lending: SQM Research

Sydney home prices are “overvalued” and will fall over 2022, new modelling reveals. See how much prices are tipped to change and which markets will be most affected.

House prices were expected to drop more than units over 2022.

Sydney property has become “overvalued” and house prices are expected to begin falling in the second half of 2022.

The worst case scenario would be a price drop as low as 7 per cent over the year, according to SQM Research modelling provided exclusively to The Daily Telegraph.

The data showed housing affordability, measured by the current gap between prices and incomes, was the worst in at least 20 years.

This included the periods just prior to previous real estate downturns in 2003 and 2017, when prices plummeted.

The affordability issues, coupled with other economic forces, suggested the market would be “sensitive” to interest rate rises or limits on bank lending and the result would be a correction in prices.

Prices have boomed over the past year. Picture: David Swift

SQM Research director Louis Christopher said a slowdown in price growth was inevitable because of the speed of the recent housing boom.

Prices skyrocketed an average of nearly 25 per cent over the past year and the explosive pace of growth meant regulators would be forced to clamp down on lending to ensure a “soft landing” from the boom, he said.

“At this time, the market is at a record overvaluation point. We’ve never seen such a gap between prices and total income,” Mr Christopher said.

SQM’s base prediction for the market released in its Housing Boom and Bust report, which assumed interest rates were kept on hold, was for minor rises in prices over the early part of 2022.

The rises, fuelled by pent up buyer demand and higher inflation, would be much lower than those recorded earlier this year and would be followed by a price correction starting in mid-2022 as regulators took measures to cool the market.

Source: SQM Research

This would drive a -2 to 4 per cent average change in median price over the year, with the base prediction assuming bank regulators didn’t intervene in the market until later in the year.

But prices could fall a 2-7 per cent next year if the cash rate were to soon increase and the banking regulator APRA clamped down on lending earlier in the year, according to the SQM forecasts.

Mr Christopher said regulators were almost certain to intervene in the market as there were signs it would overheat if left to run its course.

There were also urgent calls from major banks for intervention. “This usually suggests the change is in the pipeline,” Mr Christopher said. “APRA will want a slowdown and will intervene until it gets one.”

Pent up demand from buyers and economic conditions could see prices tick up a little before the correction, SQM said. Picture: Julian Andrews

Mr Christopher said next year’s price correction would affect houses more than units because apartment prices did not grow as quickly last year and lacked the same affordability barriers.

Renewed international migration and a return of overseas students would also boost demand for inner city apartments, he added.

SQM’s modelling was the second report from a major property researcher in a week warning of coming price falls.

Commonwealth Bank earlier this week predicted Sydney prices may begin to fall in late 2022 and drop 12 per cent over 2023.