The indicators may suggest a property market in decline but our experience shows there’s more to it than that.

We explore what’s really happening in the real estate market on Sydney’s Upper North Shore.

Why interest rates are rising

On 3 May 2022, the RBA raised the official cash rate from 0.1% to 0.35% – the first time it had lifted rates since 2010. This ended the emergency cash rate the RBA introduced at the height of the COVID in November 2020.

The cash rate effectively means the amount banks pay to borrow money. The RBA moves it up or down to stimulate or constrain economic growth. (An overheating economy is just as dangerous as an underperforming one).

Because the official cash rate affects the amount banks pay to access some of the money they then lend to borrowers, they tend to pass the cost on through higher home loan interest rates.

Back in 2020, the RBA had said that it was unlikely to lift interest rates until 2024, mainly because wage growth was sluggish and inflation was almost non-existent. But thanks to the COVID economic recovery and high levels of government spending both in Australia and overseas, that has all changed in the last six months. So, when Australia recorded an inflation rate of 5.1%, most economists believed the current interest rate rise was inevitable.

Was the market already cooling?

When banks put their interest rates up, it impacts people’s ability to borrow money. That’s partly because they’ll have to pay more each month to service the same mortgage or loan. It’s also because banks tend to tighten their lending criteria so that people borrow less.

This time, however, we noticed that many lenders had actually put their home loan rates up well before the RBA made its announcement, especially when it came to fixed-rate loans. While it was relatively easy to fix a home loan at around 2% interest at the height of the pandemic, it has been difficult to find fixed rates under 4% for the past few months.

We’d noticed this was already starting to impact the amount people were prepared to spend – particularly first home buyers and upsizers who tend to rely on borrowing to finance their homes. Plus, we observed that people were seriously factoring in a potential rate rise when they were preparing to take out a home loan.

The impact on auction clearance rates

While higher interest rates may have already impacted the property market, they aren’t the only factor at play right now. Rising inflation, Russia’s invasion of Ukraine and rising oil prices seem to have added to uncertainty, and made people less confident about the economy generally.

We’re also seeing a higher number of property listings than we did back in 2021 so the balance between supply and demand is also being impacted too.

When these factors are taken together, they’re having an impact on the auction clearance rate – or the number of places that sell before or on auction day compared to the number of properties for sale. Domain reports that the Sydney-wide clearance rate on 7 May 2022 was 58%, down from 73% at the same time last year. Meanwhile, CoreLogic reported that the preliminary auction clearance rate in the region known as ‘North Sydney & Hornsby’ was 55.9% the same weekend.

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Markets within markets

A lower auction clearance rate is a good indication that conditions have slowed. But even this doesn’t necessarily tell the full story.

After all, an auction clearance rate of 60% doesn’t mean that four out of 10 homes don’t sell at all. What it does mean is that they don’t sell under the hammer. In a market like this one, a lot of people become more circumspect about bidding, even when they want to buy. Fear of paying over holds buyers back. So many buyers hold off until after the auction and then begin negotiating with the vendors.

Even though the property ultimately gets sold, it’s not recorded in the auction clearance rate.

A lower auction clearance rate can also reflect a market in the process of recalibrating, where vendors haven’t yet caught up to where prices are at. Some may still have unrealistic expectations about what their property will sell for. In a white-hot market, the bidding sometimes rises to meet these expectations but that tends not to happen regularly when conditions are more balanced.

What we are seeing is that there definitely are fewer buyers in the market, and those buyers have more properties to choose from. However, we’ve noticed the buyers that are out there tend to be committed and willing to offer – even if that means first letting a property pass in at auction. So good properties are still selling for a good price.

We’re also seeing ‘markets within markets’, with the balance firmly in favour of buyers in some segments and sellers in others. For instance, the downsizer market shows few signs of slowing, while the prestige market is somewhat slower than it was this time last year.

A complex situation

What we can confidently say is that, while interest rates and auction clearance rates give you a ‘macro’ view of the market right now, don’t take them at face value. For a proper understanding of what’s going on, do your own research by attending open homes and auctions, and speak with a real estate professional to get their insights.

Want more?

If you’re interested in finding out more about the property market in Ku-Ring-Gai or Hornsby Shire, get in touch.

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