Employees returning to the office could pose a bigger threat to the regional housing markets than the looming interest rate rises, although worsening affordability could also accelerate price falls as some regions become more expensive than the capitals, experts say.
Louis Christopher, SQM Research managing director, said historically regional markets were less affected by interest rate rises, but were more sensitive to the changes in the local economy and housing demand.
“I don’t see a 25-basis point interest rate increase as having a major impact on the regional housing markets, but the return to the office could be a major threat to regional house prices,” he said.
“If we do see a return to the office overall, I do expect quite a large number of regions to see a fall in house prices at a faster rate.
“The regions are more volatile than the capital cities, simply because they are smaller markets with lower liquidity. So, it doesn’t take much of a change in demand for there to be a significant change in the market on the ground.”
Eliza Owen, CoreLogic’s head of research said regional housing markets were likely to see a reduction in demand once interest rates moved higher.
“Timing a shift in the housing market can be very difficult, but I imagine a downswing in housing values would be fairly broad-based across both capital cities and regions, as it’s uncommon for the two markets not to roughly perform in line with each other,” she said.
“There are likely some more expensive regional markets which are already seeing a slowdown in momentum, even if they are a while off price falls such as the Southern Highlands-Shoalhaven regions, Illawarra and Geelong which have seen a slowdown in short-term growth rates.”
The Southern Highlands-Shoalhaven region, which notched the highest annual regional growth in the 2021 at 37.7 per cent has recently posted a 0.8 percentage point drop in growth rate to 8.7 per cent in the three months ended December.
Popular coastal markets such as Illawarra, the Central Coast and Geelong have also seen similar slowdowns in short-term growth rates, said Ms Owen.
“There may be some room left for growth amid rate hikes in more affordable, peripheral areas of the high-end coastal hot spots, but I don’t think there will be too many regions avoiding a downswing over the next few years,” she said.
The rapid rise in regional house prices since the start of the pandemic has also eroded affordability – one of the regions’ biggest advantages over the capitals.
In the past 12 months, regional dwelling prices have jumped by 25.9 per cent compared to 21 per cent growth for the combined capital cities. During the December quarter, the regions have risen more than twice as fast as the capitals.
“The regions have been running very hot and have been a seller’s market for the last 18 months, so prices are at very lofty levels and no longer cheap compared to the capitals,” Mr Christopher said.
“So even a minor change to the market demand could see prices come off right off the bat.”
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