Real estate Australia: How far will home prices fall during the current downturn?

Real estate agents on the ground are already reporting price drops of 20 per cent, with spring to bring a reckoning for the struggling property market.

OPINION

In recent weeks there have been a lot of articles and discussions on how big the price fall will be in the real estate market.

Let me give you the news. They’ve already dropped. And depending on the area, falls of 20 per cent have been reported by agents who are on the ground at the coalface.

The problem with data is it normally suffers from a three or four month lag.

By the time the sale is recorded and that information is collected by data companies and analysed, the market has moved again.

Simply put, markets move faster than economists, and most of the commentary on real estate comes from the economists who are using the lagged data.

That’s why I like to collect information from the agents on a week-to-week basis.

Real estate agents are reporting price drops of 20 per cent. Picture: Newscorp- Daily Telegraph / Gaye Gerard

They are the first people to see the behaviour of buyers. And it’s very clear if you were to speak to most agents across the country, particularly Sydney and Melbourne, we have already seen a significant price reduction this year.

What distorts the numbers is the occasional sale that goes over reserve by hundreds of thousands of dollars.

But as they say, one hot day doesn’t make a summer.

The homes that normally go for incredible money in this market are the fully renovated ones. The better they are, the higher they are getting.

The reason is simple; renovations are expensive.

Building materials and labour have gone through the roof and the average buyer that wants a beautiful home will now look at buying a finished product than getting a fixer upper.

WHERE AUSTRALIAN REAL ESTATE PRICES ARE HEADED

Moving on to what prices will do in the future. As I’ve said in most areas, the 10 to 20 per cent drops have already occurred.

What we don’t know is what the remaining interest rate rises and the influx of spring stock will do to the market.

The real estate law is always sell in isolation and not in competition of many sellers as prices soften when there are too many listings.

The early indications are there will be a lot of listings sitting on the market late August and into spring.

This will be the true barometer on the health of the current Real Estate market. Basic mathematics suggests that we will see some further softening during this period but there’s no signs that there will be distress selling.

Most Real Estate agents are reporting very few forced sales and even vendors that are super keen on moving are not slashing the price of their property significantly as they simply don’t have to sell.

Many owners are well in advance in their mortgage payments and have often improved their equity position over the last few years by putting extra payments in.

There is little unemployment and rates are still at close to record lows that owners can simply hang on if they don’t get the price they want to achieve.

Many owners are well in advance in their mortgage payments and have often improved their equity position over the last few years by putting extra payments in. Picture: Newscorp- Daily Telegraph / Gaye Gerard

The $64 million question will be how aggressive will the rate rises be for the remainder of this year and next year, and where will interest rates end up by the start of 2023.

Most analysts are forecasting that they will fall at a number between five and six per cent. Significantly more than what they were earlier this year, but still significantly less than some of the interest rates I’ve seen in my career that have been as high as 18 per cent.

For the average homeowner you don’t have to lose sleep.

Most people transacting in Real Estate are doing it for lifestyle purposes and not to make money like those attempting to do so with bitcoin.

What this means is that when you’re buying and selling in the same market, you actually are in exactly the same net position. It’s a revenue neutral game when you buy and sell at the same time.

You sell high, you buy high. You sell lower, you buy lower.

Having said all of this, some owners own Real Estate that is market resilient. Interest rates won’t make a significant impact on to the value of their properties. Examples of these are beautifully renovated homes as I said earlier, large blocks of land which are always in demand and properties that are in trophy positions.

For these kind of properties there are always buyers.

Tom Panos at Auction

Tom Panos has been a highly respected figure in the local real estate industry for three decades. He is Australia’s leading real estate coach, a sough-after auctioneer, founder of Real Estate Gym and a Sky News commentator.

Originally published as Real estate Australia: How far will home prices fall during the current downturn?