last updated 08 August, 2022

After an unprecedented year of property price growth, Sydney’s real estate market is shifting. According to CoreLogic’s May Housing Flow Chart Report, Sydney property values are now -0.5% below the previous recorded high of January 2022. 

With interest rates rising, tightening lending criteria and cooling buyer demand, Sydney’s property price peak has well and truly passed. But, property prices are still well above pre-pandemic levels, which means plenty of opportunities and value remain in the market. 

With so much talk about ‘will Sydney property prices fall?’ and whether a crash is on the horizon, we wanted to set the record straight. Let’s run you through what is happening with Sydney property prices, what this means for you as an investor and how to navigate these changing market conditions with confidence.

Before we go any further, let’s get you up to speed on the state of the Sydney property market and explore the question: ‘will Sydney property prices fall?’.

While Sydney’s property market started strong at the beginning of 2022, demand and prices have been taking a turn since February 2022. Early into the year, Sydney reported its first decline in housing values (-0.1%) since September 2020, with this downturn in prices continuing ever since. 

Now sitting at $1.55 million (2.7% below the price peak of March 2022) annual growth rates are the slowest they’ve been since December 2020, although still 8.3% higher than a year ago. 

Unit prices declined for a second consecutive quarter to $790,983, down by 0.6%. All areas of Sydney (apart from Blacktown, Inner West, Parramatta, Ryde and North Sydney and Hornsby) experienced unit prices fall by over a quarter.

The latest property market movements show a geographical spread in the downturn picking up pace, with house prices experiencing their steepest drop since March 2019. Most notable price falls have been seen in:

• North Sydney and Hornsby
• Inner West
• Northern Beaches
• City and Inner South
• Sutherland
• Parramatta
• Outer South West
• Blacktown
  

So, what is causing this shift in prices? It comes down to a few key factors:

• Increased housing unaffordability: with tightening lending criteria from the banks and slow wages growth, more buyers are struggling to access the loans they need to secure properties and taking some heat out of the market.
  
• Cooling buyer demand: with interest rates rising and the cost of living increasing in Australia, buyers are more cautious of overspending on properties in 2022, leading to a drop in competition and buyer interest in properties.
  
• Higher interest rates: with the RBA increasing the cash rate to 0.35%, many of Australia’s big banks (such as the Commonwealth Bank of Australia, ANZ, NAB and Westpac) and lenders have been lifting interest rates on loans. The prospect of higher monthly repayments means buyers are wary of further increases and want to ensure they’re purchasing properties they can afford to service for years to come.

It’s no wonder that auction clearance rates are at their lowest levels in Sydney and Melbourne in 2022, too.  With selling conditions becoming more challenging, we’re seeing properties spending longer on the market with clearance rates dropping to a two-year low of 55% over the June quarter.

As housing conditions cool and home loan rates rise, homeowners are likely not in a rush to sell. The total advertised supply is currently sitting at 13% higher than last year while the number of new listings has dropped over the June quarter.

This is one of the most commonly asked questions when it comes to Sydney’s property prices: will Sydney’s property market crash?

In short, a property market crash is unlikely. However, stabilisation of property prices is happening in Sydney, and a drop in property values is likely. 

It’s important to remember just how rapidly Sydney’s property prices have risen to put this latest downturn into context. In the 12 months to May 2022, Sydney’s property prices rose an impressive 14.7% (one of the most substantial periods of growth in the past few decades). 

This exponential growth was fuelled by a low-interest lending environment, strong buyer confidence and increased demand (investors and homeowners didn’t want to miss out on this incredible period of growth and opportunity in the market). 

As we look ahead to the rest of 2022, the potential for further interest rate rises and increasing housing unaffordability will continue to cool buyer demand. 

We’ve already seen property prices begin to decline in Sydney, and this is expected to continue throughout 2022. If interest rates continue to rise, buyers’ maximum loan amounts will be lower, effectively reducing borrowing power and pricing many out of the market. 

Many economists are predicting Sydney property prices to drop by as much as 15% by the end of 2023, depending on how quickly the RBA continues to raise interest rates (and whether the banks pass these rate rises onto borrowers).

However, it’s important to note that not all parts of the Sydney property market are performing equally. CoreLogic’s latest data reveals that property values are dropping more dramatically in the top end of the market, while prices are actually rising in the lower end of the market (rising by 3.6% in the three months to April 2022).  

Now that we’ve answered the question of ‘will Sydney property prices fall?’, let’s dive into what this means for investors (like you). 

Ultimately, these shifting market conditions present a few challenges for investors and homebuyers. But, with challenges also come opportunities, and the investors who adapt and pivot their strategy will be able to ride out this latest market shift successfully.

The latest property price fall means three key impacts are likely to be felt by investors:

• Mortgage repayments will become more expensive: if you’re currently paying off a loan on your investment property, rising interest rates mean your repayments and expenses are likely to go up (unless you’ve locked in a fixed interest rate). This could mean your rental yield and profits drop unless you’re able to boost your rental income at the same time.
  
• Capital gains are no longer guaranteed: with property values stabilising and price falls on the horizon, investors following a negative gearing strategy may not long have the certainty of selling for a profit.
  
• It may take longer to build equity in your investment property: with property prices dropping and repayments increasing, it might take you longer to build up equity in your property (which can slow down the growth of your property portfolio as an investor). 

While we can’t change the answer to ‘will Sydney property prices fall?’, there are ways to navigate these changing market conditions as an investor. 

With the market softening and interest rates predicted to continue rising, there are a few steps you can take to protect yourself (and your profits as a property investor):

• Increased the value of your existing rental property through strategic value-adding renovations. Not only will a newly renovated property attract long-term high-quality tenants, but it can help you reduce maintenance costs and increase the potential sale price when it comes time to sell your property.
  
• Combat rising mortgage costs by looking for ways to reduce your expenses or increase your rental income. This could mean looking for a more experienced yet cost-effective property manager or even raising your rental to help you maintain a good rental yield.
  
• Switch to a positive gearing strategy by securing a rental in a more affordable area. With capital gains no longer guaranteed, now is the time to reconsider your investing strategy and look for an affordable rental that will help you earn stable rental income instead. 

Ultimately, there is no denying that the answer to ‘will Sydney property prices fall?’ is yes. However, a stabilisation in property values doesn’t have to mean the end of your profits as an investor. Instead, it’s important to be flexible and willing to pivot your strategy to meet the changing needs of the market. 

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