Home buyers are dropping out — will prices go with them?

The first dark cloud on what had been a sunny outlook for home prices comes from new numbers showing buyers are disappearing from the market.

The up-tempo outlook for house prices this year has just been jolted with a dramatic slump in the number of people willing to pay up for today’s prices.

A new report from Commonwealth Bank says its homebuyer index recorded ‘a very large fall’ as the indicator nosedived 40 per cent year-on-year at the end of December.

At the end of 2023 the index — a key measure of demand in the residential sector — fell five per cent in November, the decline then accelerated over December falling by more than 30 per cent.

The CBA homebuyer index is based on home loan applications for owner occupiers and investors (it excluded refinancing).

The sharp drop in buyer intentions will support the minority of forecasters in the market who have pencilled in property price declines in the year ahead. Most analysts expect last year’s nine per cent nationwide rise to be followed by a rise of three to five per cent this year.

Independent economist Stephen Koukoulas of Market Economics said: “I know that most forecasters expect prices to rise but my forecast is for a 5 per cent fall in 2024, and it has growing downside risk if this trend in the CBA home buying index continues”.

Property analysts SQM Research also went against the grain late last year in predicting ‘moderate’ price falls across 2024 in both Sydney and Melbourne.

The research agency, led by Louis Christopher, suggested homeowners should allow for falls of up to four per cent in Sydney and three per cent in Melbourne.

The news comes as mortgage repayments as a share of income are at their least affordable on record — median house prices in the larger cities are now at four to five times dual household income.

Meanwhile, wider consumer sentiment data suggests a slowdown in household spending will extend well into 2024. CBA’s Household Spending numbers — which includes the homebuyer index — suggest consumers have yet to feel the full impact of rate hikes.

According to economist Belinda Allen at CBA: “spending is negative in real terms and will remain weak on a real per capita basis.”

Gloom among consumers was also on display in the Westpac Melbourne Institute Consumer Sentiment index this week, which declined 1.3 per cent in January at a reading of 81 — this means sentiment is at levels not seen since the recession of the 1990s.

The latest sentiment numbers have been described as “deeply pessimistic” by Westpac economist Matthew Hassan.

The Westpac Melbourne Institute Consumer Sentiment index also showed a decline in sentiment towards home buying — the ‘time to buy a dwelling’ index fell 3.1 per cent into what economists describe as a ‘very weak range’ at 72.

At the very least, analysts suggest a dramatic absence of buyers will change the dynamics of residential property in the months ahead: “Quite simply, less people are willing to get into the market,” said Stuart Wemyss of ProSolution.

With wide divergence in the national market, any falls in the year ahead may be regional while nationwide figures move higher.

At the tail end of 2023, residential prices were rising in Perth and Brisbane, but falling in Melbourne, Hobart and Darwin. The same cities present the same risks this year, especially Melbourne, where there has been an exit of property investors in the wake of a string of new property taxes from the Victorian government.

Originally published as Home buyers are dropping out — will prices go with them?