Could property prices return to pre-Covid levels?

National property prices would need to fall 16.7 per cent for values to be back at pre-Covid levels according to CoreLogic.

CoreLogic Research Director Tim Lawless said with prices down 4.8 per cent nationally since the peak in April, attention is squarely focused on how much housing values could fall before levelling out.

“After CoreLogic’s national Home Value Index (HVI) surged nearly 29 per cent through the recent growth phase, the full extent of how far housing values will fall remains highly uncertain and largely dependent on the trajectory of interest rates,” Mr Lawless said.

“Mainstream forecasts for a peak to trough decline also vary remarkably but generally range from around 15 per cent to 25 per cent across the combined capital cities.

“The risk of housing values returning to pre-Covid levels varies from region to region.”

According to CoreLogic, if home prices fall 15 per cent, it would take them back to March 2021 levels and a 20 per cent drop would see the index 2.2 per cent lower than at the onset of the pandemic in March 2020. 

While a 25 per cent drop in capital city dwelling values would take the index 8.3 per cent below March 2020 levels – a similar reading to August 2016.

Mr Lawless said Melbourne’s housing market was arguably the most vulnerable to returning to pre-Covid levels.

“A further 4.3 per cent slide in dwelling values would take Australia’s second largest city back to March 2020 levels,” he said.

“This vulnerability isn’t due to housing prices falling faster than other cities, in fact, Melbourne’s quarterly rate of decline, at 3.7 per cent through the September quarter, was a milder rate of decline compared with Sydney (-6.7 per cent), Brisbane (-4.3 per cent), Hobart (-4.5 per cent) and Canberra (-4.4 per cent). 

“Melbourne simply didn’t see as much growth in values through the upswing, with a 17.3 per cent rise from the Covid trough to peak. 

“This comparatively modest rise in values means Melbourne home values don’t need to fall as far as other capitals before wiping out all of its Covid gains.”

In contrast, Adelaide’s housing market has held reasonably firm and would need to drop by almost 31 per cent before values in the City of Churches returned to pre-COVID levels, according to Mr Lawless.

“Regional markets are also looking relatively secure from wiping out their COVID gains,” he said.

“The combined regionals index would need to see values fall a further 26.8 per cent before reaching March 2020 levels. 

“Across the broad rest-of-state regions, regional Tasmania has the largest buffer, with housing values needing to plummet 31 per cent before reaching March 2020 levels.”

Mr Lawless said dwelling values across 77 per cent of the country’s regions remained at least 20 per cent above pre-Covid levels at the end of September 2022.

These regions were mostly concentrated in regional NSW (12), followed by Brisbane (9), regional Queensland (8) and regional Victoria (8). 

Mr Lawless said the large portion of regions that retained a sizeable valuation buffer was a reminder that housing values would need to fall substantially before the entirety of Covid gains were wiped out.

He said the trajectory of housing values was very much dependent on where, and when, interest rates land. 

“Cash rate forecasts from the Big 4 banking economic units range from 2.85 per cent through to 3.6 per cent, while financial markets were pricing in a 3.9 per cent cash rate by August next year,” he said.

“Clearly there remains a great deal of uncertainty around where and when monetary policy and housing values will stabilise.”

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Rowan Crosby

Rowan Crosby is a freelance journalist specialising in finance and real estate.