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Australian property prices fall at record-breaking pace (and are still too expensive)

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Interest rates have risen so fast it has caused house prices to fall 8.40% in 9 months. And we haven't hit the bottom.

Since May last year, Australian property prices have fallen more than at any point in history. We're in completely uncharted territory for the property market.

Figures released by CoreLogic today show an 8.40% decline in prices from the market's previous peak. This "peak to trough" decline (from the market's previous high to this point) is the biggest and fastest on record.

And with further interest rate rises on the cards in 2023, we haven't hit the bottom yet.

A graph showing historic and current peak-to-trough property price falls across Australia

Back in May of 2022, the median national house price was $748,635. Today, factoring in that 8.40% price drop, that house would be worth $685,750. That's around $62,000 in value lost.

Of course, that's using a very broad national figure. Property prices behave differently in every city and a lot depends on the specifics of each individual property as well.

Prices have fallen much more sharply in the most expensive property markets. Sydney is down 13%, Melbourne 8.6% and Brisbane 10%. Some other major cities have recorded much smaller drops in prices.

Why are prices falling fast? It's the interest rates

Here's a simple rule of thumb: property prices tend to rise when money is cheap and easy to borrow. Cheap means low interest rates while easy means lenders are willing to lend and regulators aren't putting too many restrictions on how much people can borrow.

Interest rates were incredibly low in 2020 and 2021 as prices soared. For a while there, the benchmark cash rate was just 0.10%. Borrowers enjoyed home loan rates under 2%.

But then the Reserve Bank lifted the cash rate by 300 basis points to 3.10% in 8 months. This rate rise cycle started in May 2022, at the market's peak.

The reverse of our rule holds true: property prices fall when money is expensive and harder to borrow.

Now it's quite hard for a borrower to get a home loan with a rate below 4.50%.

Prices are plunging, but that's off the back of massive growth

Even this record downturn isn't enough to make property magically affordable for first home buyers.

Property prices rose rapidly in 2020 and 2021, fuelled by low interest rates and pent-up demand from the COVID lockdowns.

In May 2022, Australian property prices had risen 19.8% in the previous 12 months. According to CoreLogic, "At the end of 2022, home values were still 16.0% higher than they were 5 years ago, and 59.8% higher than they were 10 years ago."

This means that long-term property owners have still seen major growth in the value of their homes. And while first home buyers will welcome lower prices, they're still facing an uphill battle.

And rising interest rates mean their home loan repayments will be bigger each month.

Home loans are higher now, but you can always find a better deal than the average. Check out some of the market's lowest rates. Want to learn more about how rates affect prices? Read this article on property prices and economic downturns.

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