Australian home prices have been falling for well over a year in average weighted terms, pulling back after a strong period of growth throughout most of the prior decade.
But how does the current downturn compared to those seen in the past?
Thanks to CoreLogic, we now know the answer at this point in the cycle.
As seen in the first chart below, nominal prices have fallen 6.8 per cent since peaking in October 2017, making the current downturn the third-largest in percentage terms since the early 1980s when reliable records were first kept.
It’s also the second-longest downturn over this period, only surpassed by the period of falling prices seen at the start of the decade.
Much of the national decline reflects that prices have been falling in Australia’s capital cities, where the vast majority of homes are located.
Since peaking in 2017, prices across the capitals have fallen 8.6 per cent in weighted terms, paving the way for the current downturn to become the largest in percentage terms since 1980 should values continue to fall in March. Based on the early data received during the month, that appears likely.
The national downturn has been led by those capital cities that lead the prior upswing in prices, Sydney and Melbourne, the largest and most expensive in Australia.
These cities contain around 40 per cent of all Australian homes, and just over 50 per cent of the nation’s entire housing wealth. That means price movements in these locations are highly influential on nationwide measures.
Sydney’s median home price has now fallen 13.2 per cent since peaking in July 2017, making this the largest and longest downturn in Australia’s most expensive housing market since data was first collated by CoreLogic.
In Melbourne, median prices have also skidded by 9.6 per cent from November 2017, leaving this downturn on track to become the steepest on record in percentage terms should price falls already seen in March be maintained in the latter parts of the month.
While Sydney and Melbourne have led the current national downturn, the scale of the declines – both in terms of size and duration – pale in comparison to the falls seen in Perth and Darwin, Australia’s mining capitals, over the past five years or so.
Perth’s median price has fallen 17.8 per cent since peaking in June 2014, coinciding with an unwinding of mining sector investment and weakness in commodity prices.
Similar trends have been seen in the Northern Territory capital with Darwin’s median price now down a whopping 27 per cent in nominal terms since May 2014.
While the declines in the mining capitals reflect individual economic circumstances in both locations, it demonstrates that price downturns can last for a considerable period of time, especially after a period of strong price growth.
So, why is this happening?
While there have been a number of factors that have contributed to the latest national downturn such as a large increase in new supply, a significant decline in foreign investor activity, weak household income growth, out-of-cycle mortgage rate increases and growing expectations that prices will continue to fall for some time yet, among others, the main influence has been a tightening in lending standards, limiting the amount that some prospective home buyers can borrow. In some instances, this has also prevented some buyers from obtaining finance outright.
That makes this downturn somewhat unique given periods of price weakness have normally coincided with higher mortgage rates in the past.
According to Cameron Kusher, Research Analyst at CoreLogic, given current trends and the likelihood that lending standards won’t be relaxed by any significant degree in the period ahead, price falls across parts of the country could continue for some time yet.
“Our models show, at least for the short-term, that values are likely to continue trending lower, with the rate of decline easing later this year and into 2020,” he said.
As for when prices will eventually bottom, and then start to increase again, Kusher believes it could be a long time until prices return to prior peaks, even if the RBA cuts rates as many now suspect.
“Although there is an expectation that interest rates may move lower, we probably won’t see the entire rates cuts passed through to mortgage rates and the much tighter credit conditions are likely to limit any rebound in the housing market, particularly given borrowers are being assessed on their ability to repay a mortgage at a much higher rate of above 7 per cent,” he said.
Beyond lending standards and mortgage rates, labour market conditions will also remain a key domestic consideration as to when and by how far prices will fall before they bottom out.
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