Australia’s housing downturn has gotten worse — figures from CoreLogic showed that the current decline in home values have reached a new historical record in the first week of 2023.

The CoreLogic Daily Home Value Index (HVI) hit a decline of 8.4% on 7 January 2023 from the peak achieved on 7 May 2022.

This latest HVI reading breaks the previous peak-to-trough decline of 8.38% recorded between October 2017 and June 2019, when the downturn lasted for 20 months.

The current downturn been only nine months in the making, which means further falls are expected in the months ahead off the back of further interest rate hikes.

CoreLogic head of research Eliza Owen there are four likely reasons why the housing market managed to beat the previous record faster than the previous downturn.

1. Successive rate hikes

Ms Owen said the main force seems to be the recent upwards trend in the cash rate, which started in May when housing values reached their peak.

“A 300-basis point increase in the underlying cash rate over just eight months has resulted in a rapid reduction in borrowing capacity, lowering the amount buyers can offer for homes,” she said.

Further, repayments are going up due to higher interest costs, discouraging some potential buyers from participating in the market.

2. High indebtedness

Australian households are highly indebted — a recent estimate by the Reserve Bank of Australia pointed to a housing debt-to-income ratio of 188.5%.

The ratio was 162% ten years ago and 130.2% 20 years ago.

“Higher household indebtedness may have increased the sensitivity of housing values to interest rate rises,” Ms Owen said.

3. Higher living costs and changing spending patterns

One of the reasons behind the successive rate hikes is the 30-year high inflation rates, which when coupled with post-lockdown surge in spending has affected household savings.

Ms Owen said the erosion of household savings reduced the capacity of many Australians to come up with a home loan deposit.

“This trend is also being reflected in low consumer sentiment figures, which has plunged to near-recessionary levels and traditionally coincides with fewer home sales,” she said.

4. Sales rush hangover

The current downturn in home prices seems to be a natural phase following the hangover from the elevated sales and listings activity amid the boom in 2021, when more than 619,000 transactions were made.

Ms Owen said 2021 recorded the highest volume of housing sales in more than 18 years.

“Fuelled by record-low interest rates and stimulus such as HomeBuilder and low-deposit home loan schemes, may have brought forward many buying and selling decisions through the pandemic, resulting in less transaction activity in subsequent years,” she said.

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