The bellwether suburbs leading a new round of property price gains

Home values in traditional bellwether suburbs bounced last month as interest rates fell, improving buyer sentiment and increasing how much money buyers could borrow.

More expensive neighbourhoods traditionally lead property market upswings and downturns, although economists warned this upturn is only in an early stage and the outlook for property prices remains uncertain.

Home values in Melbourne’s affluent Stonnington (east) region and Sydney’s eastern suburbs (north) region recorded the largest percentage point changes in February compared to January, CoreLogic figures showed. The former swung by 2.6 percentage points between its January loss and its February gain, while the latter swung by 2.5 percentage points.

There were also swings of at least 2 percentage points in Sydney’s Leichhardt area and Hornsby, and in Melbourne’s Bayside and Manningham (east) regions.

Some of these are areas where prices have been falling and buyers are starting to perceive value – the eastern suburbs (north) is still down about 4 per cent from its peak, while Bayside is down 10.9 per cent.

The research shows values are rising in areas that have historically been early indicators of market recovery, and follow figures showing the upper end of the market overall in Sydney and Melbourne rebounded more strongly than the more affordable segment.

Last month the Reserve Bank cut the cash rate to 4.1 per cent, which put a floor under home value falls. But the recovery so far has been uneven and could depend on the path of interest rates and inflation.

CoreLogic economist Kaytlin Ezzy said the upper end of the housing market tended to be the most reactive to changes in interest rates, although she cautioned the cycle is in its early days.

Areas where home values have bounced probably have more demand from buyers and fewer owners looking to sell, she said.

“[We’re] generally seeing that little bit of increase in demand, also at a time when potentially there’s going to be less property going up for sale,” she said.

Home values bounced in affluent areas.Credit: Dean Sewell.

“As interest rates fall, there’s less impetus for people who maybe were borderline of mortgage distress, they won’t be as likely to list their property, especially if values are rising.”

She thought that a mix of improved sentiment and increased borrowing capacity had caused the price swings.

“Those upper quartile properties do require more funds to get in. It does require a larger chunk of capital to enter that market, and as rates are higher, that requires a higher holding cost,” she said.

“Sentiment equally is also going to be a factor playing into it. When rates start to fall, people start to have that little bit of extra money … they feel a little bit wealthier.”

Ezzy said the outlook for the property market would depend on interest rates. There were early signs of a slower flow of new listings in Melbourne, which could put upward pressure on values, but housing affordability continues to be a challenge, she said.

Westpac senior economist Matthew Hassan agreed that areas such as the eastern suburbs have been a bellwether for Sydney, leading other areas in price moves.

He thought the overall price gains last month may be slightly affected by seasonal factors, such as the reopening of the auction market in February for the new year, but thought it was a genuine bounce.

“There is a little bit of an improvement in borrowing capacity as happens when rates move. It might get bid away quite quickly if prices rise,” he said.

“There’s a wider expectation though that interest rate cuts don’t often come in ones, they come in twos and threes.”

But the outlook would depend on the path of interest rates, he said and would vary by location. In Brisbane and Perth, for example, where prices have been rising, growth slowed last month.

“Maybe it’s better to describe at this stage the Sydney and Melbourne markets as stabilising, but beyond that, you would think this is quite a constrained upturn for the market,” Hassan said. “The starting point for affordability is pretty stretched, the extent of the interest rate [easing] coming through is not expected to be large, and we do have some slowing in previously very hot markets.”

Mortgage broker Chris Foster-Ramsay has been fielding calls from some clients hoping to borrow more and asking if there will be further cuts.

Some families have been able to increase their budget by $50,000 or as much as $100,000, the Foster Ramsay Finance principal broker said.

A handful tried to buy a home fast, anticipating rate cuts pushing up property prices. Some were successful, and some were not, he said.

“Once everyone came back mid-January, I started to see a bit of a swing, and as the chatter among media outlets and the like became more prevalent, that spurred people into action,” he said.