Australian house prices recorded their smallest increase in about a year in December with a rise of 1.0 per cent for the month, well down on the monthly increases of 1.5-2.5 per cent seen through the bulk of 2021.
The cooling in house prices comes as a surge in supply, still largely closed international borders and a slight tightening in credit take some of the heat out of the market.
The slowing is being led by Melbourne where, according to Corelogic, house prices actually fell 0.1 per cent in December. Price growth was weaker in Sydney (up just 0.3 per cent) and Perth (up 0.4 per cent).
The house price boom continued in Brisbane (up 2.9 per cent), Adelaide (up 2.6 per cent) and regional Australia, where prices rose a hefty 2.2 per cent.
Price growth was still a solid 1.0 per cent in Hobart, 0.9 per cent in Canberra and 0.6 per cent in Darwin.
For 2021 as a whole, the price gains were nothing short of spectacular.
Hobart led the way with a gain of 28.1 per cent, with Brisbane up 27.4 per cent, regional Australia up 25.9 per cent, Sydney 25.3 per cent and Canberra up 24.9 per cent through the year.
In 2021, Adelaide prices rose 23.2 per cent, Melbourne 15.1 per cent, Darwin 14.7 per cent, while Perth registered the least rapid price gains at 13.1 per cent.
Where to now for housing?
Rarely, if ever, do house prices continue rising after a 20 per cent rise in the prior year.
2022 is unlikely to be different, with prices set to flatten or even fall across most cities and regional areas.
At this stage, price falls of about 5 to 7 per cent across most areas is likely, with the path for interest rates and the extent to which immigration is allowed to return - as international borders reopen during the year - determining whether the falls are more significant.
A strong level of dwelling construction will also work to dampen prices.
In the past 12 months alone, there have been more than 230,000 dwelling building approvals. When these are completed over the course of the next 12-18 months, they will add to the housing supply.
If population growth is weak, which seems likely, these extra houses will need to see fresh buyers emerge to keep prices rising. Those buyers will be largely absent.
Interest rates will be important in the cycle
The extent to which interest rates rise will be important in determining the extent of the house price downturn.
While the Reserve Bank appears reluctant to increase interest rates before 2023, the futures market is eying a surge in inflation pressures and is pricing in a series of interest rate rises through 2022 and 2023.
From the current record low 0.1 per cent official cash rate, the market is pricing in interest rates rising to 0.25 per cent around July 2022, 0.5 per cent in September, 0.75 per cent in November and then 1.5 per cent around the September quarter 2023.
This is a cumulative total of 1.4 percentage points of interest rate increases, which for anyone looking to buy a property in the next year or two will have a significant cash-flow effect on their borrowing capacity and, as a result, the extent to which prices can be bid up at auction.
If, as appears likely, the market has not priced in enough interest rate rises over the next 18 months to two years, and rates rise by 2 percentage points or more, the cyclical impact of the housing market could yet be more extreme.
This is a scenario, growing in likelihood, that would see house prices not only dip 5-7 per cent in 2022, but a further 5 per cent or so in 2023, bringing total falls to around 10-15 per cent from the upcoming peak.
It is a scenario that might be the unintended consequence of the RBA focusing on a surge in inflation and hiking interest rates to tackle it.