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What's behind Australia's multi-speed housing market?

Elevated view of waterfront houses with the Sydney CBD in the background.
House prices in Sydney fell in February for the first time in 17 months. (Source: Getty) (zetter via Getty Images)

The Corelogic house price data for February show a huge division unfolding for house prices across different parts of Australia.

Prices in some cities have stalled and look to be heading lower, while in others, the remarkable price boom continues to run at a rapid pace.

Also by Stephen Koukoulas:

This divergence in prices shows up with the following table of house prices in February, in the three months On a monthly basis, the price extremes were a fall of 0.1 per cent in Sydney and a strong 1.8 per cent rise in Brisbane.

Table showing divergence in house prices across February, the 3 months to February and the 12 months to February..
(Source: supplied)

Over the past three months, the divergence was even wider with the weakest being Melbourne - where house prices barely rose, up just 0.2 per cent - while at the top was Brisbane, with a rise of 7.2 per cent.


In the past year, there was a huge difference between the city with the smallest price rise – Perth, which was up 8.6 per cent - and the strongest, which was Brisbane with a 29.7 per cent annual rise.

Why these extreme differences?

The factors behind the massive divergence in prices are complex.

One thing is clear and that is that interest rates - either the level or the rate of change - have only a moderate influence on house prices. This is a safe claim to make given that, in the past year, house buyers and sellers in Perth and Brisbane, for example, have dealt with the same interest rates and lending conditions. Obviously.

And while there has been a ramping up in the interest rate for fixed-rate mortgages in the past few months, it is odd that it has impacted Sydney and Melbourne prices, as some claim, but had little effect on prices in Brisbane, Adelaide and regional Australia, by way of contrast.

A longer-run history of Australian house prices shows a similar divergence, with interest rates having only a moderate influence.

For example, the same interest rate has been charged Australia wide yet, since 2010, house prices have risen around 110 per cent in Sydney, just 10 per cent in Perth and they are actually down in Darwin.

Other factors clearly at play

Those factors include population growth relative to new construction, the overall performance of the economy in each city, state and territory and things like zoning and planning rules at a local government level.

Household formation rates and demand for an unrented second property are also influential.

What is also important is the state of the labour market. Is unemployment low, job creation strong and are wages increasing?

Suffice to say, the talk of increases in official interest rates over the remainder of 2022 and into 2023 will likely cause a few potential buyers to hold back with their bidding and borrowing.

This will have a moderate impact on house prices, but to say it is a dominant issue ignores the patchwork price pressures we are seeing now and which have been evident for many years.

As the past two interest-rate-hiking cycles show, there is no guarantee the looming rate increases will result in price falls.

As a reminder, between 2002 and 2008, the Reserve Bank (RBA) increased official interest rates by 300 basis points. House prices, in this period, rose over 30 per cent, defying the extra borrowing costs.

In 2009 and 2010, the RBA hiked 175 basis points and house prices were broadly flat – they certainly did not fall.

And then there was the opposite experience in 2017 to 2019 when house prices in Australia did fall by around 10 per cent. This was when the RBA was part way through one of the most aggressive rate-cutting cycles Australia has ever seen.

All of this suggests the current divergence in house prices from city to city is being driven by the usual factors – supply and demand in particular, labour market trends and household formation - and that interest rates are a secondary issue.

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