What are the signs that a real estate market has peaked?

“The context of what happened last year with this rising price phenomenon meant that prices had to go up,” he said.

“If there’s talk of rising interest rates and the Reserve Bank hikes rates, that’s going to affect people’s willingness to pay to buy a home.”

Many buyers are reluctant to pay more and more for a home.Credit:Joe Armao

Interest rates rise

Banks have been raising fixed mortgage rates for months, although the Reserve Bank has yet to raise rates.

Prospective buyers, faced with the prospect of higher monthly mortgage payments, may choose not to borrow as much, or may not be able to borrow as much, and instead compromise on the type of property or suburb that they hoped for.


“Fixed rates have been rising for about nine months,” said Shane Oliver, chief economist at AMP Capital.

“So you could tick off — we’ve seen affordability deteriorate, which is crowding out more buyers, and we’ve seen a trend towards higher interest rates on fixed rates.”

Once the liquidity rate picks up, likely later this year or next, several economists expect reduced buyer budgets could push home prices lower.

dr Oliver said prices in Sydney could already have peaked or may be recovering this month, but either way the two largest cities are at least approaching peak prices.

Homebuyer sentiment is weakening

A closely watched indicator of homebuyer sentiment has deteriorated, said Westpac Senior Economist Matthew Hassan.

Many people doubt that now is a good time to buy a property.

Many people doubt that now is a good time to buy a property.Credit:Eddie Jim

The Westpac-Melbourne Institute Index of Consumer Sentiment asks if it’s a good time to buy a home and offers a glimpse into owner-occupier thoughts on affordability.

“It’s come down quite a bit over the last year, albeit from a pretty high starting point,” Mr Hassan said. “It points to a downturn in the next six months or so.”

He added that investor demand is gradually outpacing owner-occupier demand.

Investor <a class=loans are more in demand than owner-occupier loans.” loading=”lazy” data-src=”https://static.ffx.io/images/$zoom_0.168%2C$multiply_0.4431%2C$ratio_1.5%2C$width_756%2C$x_0%2C$y_0/t_crop_custom/q_86%2Cf_auto/add488a9e63f09f89d75b726a4a9c199e4ccc8c2″ height=”224″ width=”335″ data-srcset=”https://static.ffx.io/images/$zoom_0.168%2C$multiply_0.4431%2C$ratio_1.5%2C$width_756%2C$x_0%2C$y_0/t_crop_custom/q_86%2Cf_auto/add488a9e63f09f89d75b726a4a9c199e4ccc8c2, https://static.ffx.io/images/$zoom_0.168%2C$multiply_0.8862%2C$ratio_1.5%2C$width_756%2C$x_0%2C$y_0/t_crop_custom/q_62%2Cf_auto/add488a9e63f09f89d75b726a4a9c199e4ccc8c2 2x”/>

Investor loans are more in demand than owner-occupier loans.Credit:Brook Mitchell

Status of home loan approvals

When a housing market peaks, economists would expect demand for home loans to fall as fewer people try to buy homes.

New loan commitments fell during last winter’s delta lockdown but have rebounded since November, hitting a record high in January, ABS figures show.

This could indicate that demand will hold for a while longer, although investor credit has grown faster than owner-occupiers, which have been the engine of the recent housing boom.

“There are now clearer signs that the upturn in owner-occupiers is peaking,” Hassan said. “There are some tentative signs that we’re reaching the topping-out ceremony.”

Last year, banking regulators slashed the maximum amount buyers could borrow, directing lenders to ensure borrowers can repay their loans if interest rates rise by 3 percentage points. The previous benchmark was 2.5 percentage points. This has cut the budget of some buyers by around 5 to 10 percent.

Auction clearance rates are falling

When a real estate market is at its peak, auction eviction rates typically fall as a smaller proportion of homes listed for auction find buyers.

Clearance rates in Sydney and Melbourne have slipped from their highs last autumn but are still in positive territory and are not yet signaling a decline in prices.

Auction clearance rates have come down but are still positive.

Auction clearance rates have come down but are still positive.Credit:Meredith O’Shea

Last weekend, Sydney had an interim release rate of 76.3 percent and Melbourne had 67.2 percent.

A sell-through rate of 70 percent typically indicates annual price growth of about 10 percent, while the rate must drop below 60 percent to be considered a buyer’s market.

But there are signs that sellers are more willing to accept earlier bids, an indication they don’t expect strong competition on auction day, and some are reducing their reserve prices to secure a sale under the hammer.

Some buyers make bids under the hammer, while others make bids before the auction.

Some buyers make bids under the hammer, while others make bids before the auction.Credit:Simon Schlueter

“Such high auction clearance rates are usually consistent with prices still rising, but I think what could happen is that a lot of sellers suspect we’re at the peak of the market and are therefore just happy to trade whatever and sell the auction result ends up,” Mr Aird said.

“Usually that’s a good indicator, but right now it could send the wrong signal.”

Government incentives are declining

Some of the support for first-time home buyers was rolled out when the pandemic was over and demand from first-time home buyers has eased.

The HomeBuilder program to support construction jobs in the early days of the pandemic has come to an end.

The HomeBuilder grant has expired.

The HomeBuilder grant has expired.Credit:Paul Rovere

The state First Home Loan Deposit Scheme is still operational, and state governments still offer stamp duty concessions on entry-level homes, although these are becoming harder to come by as prices rise.

Affordability deteriorates

Home prices have skyrocketed and many buyers can only afford to pay that much, putting a handbrake on further price growth.

Over the course of 2021, Sydney house prices rose 33.1 percent and units 8.3 percent, while Melbourne homes rose 18.6 percent and units 6 percent, figures from Domain show.

Even a modest home is becoming less and less affordable.

Even a modest home is becoming less and less affordable.Credit:Paul Rovere

dr Oliver said a market spike is usually preceded by a period of declining price growth rates when earnings are slowing – they rarely rise and then stall.

“This is invariably preceded by a deterioration in affordability,” he said.

correction threatened

Once interest rates rise, economists expect house prices to fall, but the peak is unlikely to be sharp or consistent.

“In the longer term, the more usual cycle for house prices is a steep rise followed by a long period of flat, perhaps slightly declining, prices,” Hassan said.

“It’s more common to hit a new plateau and have a period of relative stability. It’s not a pendulum that we automatically swing into a correction phase.”

Westpac forecasts a 7 percent decline in home prices next year and 5 percent the year after, while CBA forecasts an orderly correction of 8 percent in 2023 and ANZ forecasts a 6 percent fall in 2023, all moderate declines in recent gains , meaning housing is likely to remain expensive relative to income.


Smaller capitals could also rise longer as Sydney and Melbourne reach the top. And expect the most coveted homes to still attract hot competition at auction, while properties with defects take longer to find a buyer.

Mr Aird said price declines can develop a bit of momentum of their own.

“Once buyers expect prices to go down, they invariably go down because buyers tend to wait expecting prices to go down, and then they go down,” he said.

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