Property price weakness: why it’s not worth worrying about falls

Rising interest rates have pushed down property prices in many cities and threaten to inflict more pain. But it doesn’t spell financial doom.

House prices have been dropping nationally for about a year and more falls are expected by many forecasters as interest rate rises continue to bite.

So far it’s been nowhere near the dire predictions of those tipping a 15-20 per cent plunge from 2022 peaks.

Capital cities overall are down 4.9 per cent from their peak, led by Sydney (-6.6 per cent), Melbourne (-6.1 per cent), Hobart (-4.1 per cent) and Brisbane (-3.5 per cent), according to PropTrack data. Some cities are still climbing, with Adelaide and Darwin reaching new peaks last month.

The biggest mortgage pain is yet to come. Many fixed-rate mortgages will soon revert to high variable rates, but I don’t think we will see 15 per cent-plus drops – especially as some capital city price falls appear to be flattening out.

Hopefully by the time the fixed-rate shock strikes, the trajectory of Reserve Bank rate rises will be back on its way down or at least getting closer to that point. It should be enough to prevent mass destruction of demand for housing that would push prices sharply lower.

Price falls do not greatly impact a vast majority of homeowners – unless they are struggling to refinance or sell right now and their home is in negative equity.

Weakness is not necessarily a worry. Here’s why:

MORE THAN AN ASSET

Property’s most important role is not financial. It provides shelter, space for family and freedom to put a stamp on your surroundings.

Its capital growth is completely tax-free, and it doesn’t count towards pension assets tests – meaning retirees can own $3m homes and still receive full age pensions.

Blue skies for property owners and investors will return eventually. Picture: iStock

LOOK LONG-TERM

Short-term fluctuations in home values may grab headlines, but the longer-term picture is clear and positive. In the past 20 years, house prices in every capital city have either doubled or trebled.

Those who own and invest for at least 10 years almost always come out on top.

SAME MARKET SELLING

Property price falls should not be stressful to people buying and selling at the same time in the same market.

Weakness in the home you’re selling should roughly be matched by a corresponding price fall in the home you’re buying.

Remember that the true financial value of a property is not what a real estate agent thinks it’s worth, or what you think it’s worth. It’s the price someone is prepared to pay for it when you sell it.

SOME BENEFIT FROM FALLS

Lower property prices are good news for first-home buyers and investors looking to bag a bargain.

It’s nice to grab something at a 5-10 per cent discount rather than pay full price or more.

However, not every buyer is in a position to pounce, particularly after interest rate rises slashed buyers’ borrowing capacity because banks now assess their repayment capability at 3 per cent above prevailing rates.

Hopefully for borrowers, rates will start falling later this year.

But prices will likely remain subdued, creating a potential sweet spot for buyers looking for the best possible deal.

Originally published as Property price weakness: why it’s not worth worrying about falls