Putting Australia's property price falls into perspective

Property price falls have been dominating the headlines recently, but for buyers, sellers and owners it's important to put those figures in context.

Let's start by looking at what has actually happened to prices.

Rising interest rates and the resulting decline in borrowing capacities have indeed weighed on home values. Nationally, home prices have been falling since March 2022 and fell a further 0.1% in January, according to the PropTrack Home Price Index.

Nationally, that means price have fallen 4.5% since their peak.

Sydney has led those price falls, with prices starting to fall a little sooner, and by more. Prices in Sydney are now down 7.5% since their peak in February 2022.

Melbourne is not far behind, with prices down 6.4% since peak. Prices are holding up a bit better in other cities, particularly Adelaide, where prices are down just 0.2% since they started falling in November.

These falls are not insignificant - and have been a sharp turnaround from conditions in 2021. But when it comes to property prices, historical context matters.

First, these price falls come after an exceptionally strong year for prices in 2021, which means home prices are still much higher than they were pre-pandemic.

To put in context just how unusual 2021 was, the 23% that prices grew across 2021 was the third-fastest year of price growth nationally in 140 years.

That strong growth during 2021 means that prices nationally are up almost 30% compared to three years ago, even with the recent downturn.

In both Brisbane and Adelaide - popular cities with buyers during the pandemic - prices are up more than 43% compared to three years ago. And even in Melbourne - which did not see as strong a boom during 2021 - prices are up 14%.

While anyone that bought near the peak in 2022 has probably seen their home value fall relative to when they bought, most homeowners aren't in that boat. That's because vast majority of Australians bought before that peak.

This reality is there just aren't that many households that buy a home in any given year. To put that in some context, between January and March 2022 – the point where prices peaked – only around 140,000 homes changed hands across Australia.

That represents just 1.3% of Australia’s more than 10.7 million homes. Even during October to December 2021 - a very busy period in the market, and a point at which prices were also higher than today - only around 1.6% of homes changed hands.

The second important piece of context for understanding the current downturn is that price downturns are not that uncommon – since 1990 there have been six national downturns of note (including the current one).

So how does the current downturn compare to previous ones?

The current downturn was initially very steep, with prices falling by as much as 1% in a month. Those sharp falls coincided with an abrupt change in outlook from the RBA, which resulted in it successively raising rates by 0.5 percentage points. But the pace of falls has started to moderate more recently.

In sum, the current downturn is still a little shorter and shallower than the downturns in both 2008-09 and 2018-19.

That said, prices are likely to keep falling this year. We expect that prices nationally will fall a further a further 7% to 10% by the end of 2023.

As a result, some households, particularly those that bought close to peak, could see their home value fall from what they paid. But much depends on how much further, and how fast, the RBA raises interest rates to get inflation under control.

The expectation is the RBA has another couple rate hikes left to go, which means the peak of the cash rate is in sight.