“The boom is over and property prices are falling, with the pace of decline accelerating,” says Shane Oliver, AMP Capital’s chief economist.

Buyers agent Cate Bakos adds: “It remains a very segmented market with regional and capital market prices falls and rises not synchronised. Buyers are becoming more particular, which means well-renovated properties with amenities are still in strong demand.”

A shortage of building materials, rising costs of renovation and difficulty finding experienced and qualified tradies mean buyers are increasingly reluctant to buy a property that needs additional work, Bakos says.

In Sydney, buyers’ agent Patrick Bright says there’s increasing “argy-bargy” in the market because the likelihood that prices will tumble in coming months is resulting in buyers not being willing to pay the asking price.

“That’s the mental gymnastics being caused by increasingly negative sentiment,” says Bright.

Prestige properties with unique attractions, such as harbour views or proximity to quality schools, continue to attract buyers, particularly from China, Singapore and Hong Kong, say agents.

Buyers’ agent David Morrell says: “Triple A areas are growing stronger and are still seen as a safe haven.”

Morrell says he will “put his head in a noose” by predicting rate rises and weakening sentiment “is not going to affect Melbourne’s top end by one iota”.

Martin Schiller, a sales agent for Savills specialising in Sydney properties ranging in value from $10 million to $30 million, agrees the high-quality, prestige end of the market remains robust.

“There is some price erosion where price is the only differential in the property compared to competing properties on the market,” Schiller says.

According to CoreLogic, which monitors property markets, Sydney’s clearance rates have fallen below 50 per cent, which is the worst outcome since the outbreak of the COVID-19 pandemic in early 2020 imposed restrictions on house inspections and auctions.

Sales and prices to fall

Auction numbers are down more than 20 per cent across the nation’s combined capitals, including a 40 per cent drop in Melbourne.

There is rising market tension, with the Reserve Bank of Australia raising the cash rate to 1.35 per cent, a 0.5 percentage point increase and the third successive rate rise in three months – the fastest back-to-back rate rise in nearly 30 years.

AMP Capital’s Oliver expects the cash rate to peak at about 2.5 per cent in the first half of next year with cuts in the second half of next year. He expects prices to fall by about 15 to 20 per cent.

Martin North, principal of Digital Finance Analytics, an independent financial services consultancy, who also expects prices to fall by about 20 per cent, warns buyers’ confidence is falling and capacity to pay is rapidly weakening because of rising interest rates.

“If you really need to sell, then you have to sell,” says North about rising living costs forcing some sales. “Lenders are discreetly encouraging troubled property owners to put their places on the market.”

The number of distressed residential listings jumped by more than 10 per cent across NSW in June compared to the previous month, as owners struggled with falling demand and rising costs, according to SQM Research, which monitors property markets.

The Gold Coast has the highest number of distressed listings, with 315 homes, followed by Western Australia’s central coast area with 201, and Queensland’s Sunshine Coast with 185, according to SQM.

Distressed residential property listings happen when a property has to be sold quickly, often at a reduced price and possible financial loss for the owner.

Recent examples of heavily discounted sales include a three-bedroom, freestanding Victorian cottage in Port Pirie, South Australia, which had a price cut of $119,000 to $99,000 after being on the market for more than 420 days.

In Seven Hills, about 36 kilometres north-west of Sydney, a six-bedroom, two bathroom weatherboard house has had its price reduced by $20,000 to $930,000 after being on the market for 55 days.

A home in Tartura, about 180 kilometres north of Melbourne, has had its price slashed from $870,000 to $660,000 after being on the market for 58 days.

In a bid to sell prestige apartments, developers are offering agents higher commission and buyers lucrative interior design and furniture packages for penthouses and sub-penthouses at a $3 billion development at Melbourne’s Southbank.

Best rates

Borrowers, who just over a year ago were scrambling to get into rock-bottom fixed-rate mortgages, are switching in record numbers to variable rates, typically as their fixed term ends.

Headline rates for top one-, three- and five-year fixed rates that had fallen below 2 per cent last year for a $1 million borrower with a 20 per cent deposit seeking a 30-year loan have more than doubled.

But there are still some sharp rates for keen borrowers.

For example, the cheapest one-year fixed rate comparison rates (which is the real cost of borrowing after including additional loan costs) range from Tic:Toc Home Loans 2.82 per cent to Beyond Bank’s 4.69 per cent.

“Borrowers are still really keen to lock in a low fixed rate,” says Laura Osti, Tic:Toc spokesperson.

Cheap three-year rates include BCU’s 4.75 per cent comparison rate and Goldfields Money 4.48 per cent.

The cheapest standard variable comparison rates on offer from the big four range from 3.29 per cent to 3.48 percent.

Australian Finance Group, the nation’s largest mortgage aggregator, says the number of borrowers applying for fixed rate mortgages has dropped from a record high 40 per cent this time last year to less than 10 per cent.

The total value of refinancing rose by more than 3 per cent during May, with owner-occupier refinancing hitting a record high, according to the Australian Bureau of Statistics analysis.

Cashbacks and discounts

Borrowers can negotiate sharper rates and big cashbacks. For example, Citi is offering $4000 where the home loan is $750,000 or more for new purchases and refinancing applications. The amount rises to $6000 where the loan is $1 million or over.

Key issues a borrower should consider with a new loan include:

• What rates are on offer and are there any cash incentives to cover switching costs?
• Can extra payments be made before the next rate rise?
• Is the loan portable so that it can be switched to another lender?
• Does it include money-saving features, such as an offset account, or allow additional payments?
• What are the fees and charges? Brokers claim few borrowers are breaking fixed rates, which can result in high discharge fees. Other costs to consider include application, settlement and state government fees, such as mortgage registration, which can cost $500.

Mortgage brokers, such as Christopher Foster-Ramsay, principal of Foster Ramsay Finance, claim that lenders are more likely to negotiate cheaper variable rates for borrowers on packages that also include other features such as waived fees on credit cards, discounted insurance and offset accounts.

Offset accounts enable mortgage interest to be reduced by putting regular payments, or lump sums, such as bonuses, into a savings or current account.

Some banks allow borrowers to open multiple offset accounts – one for bills and committed expenses, and another for everyday spending.

Brokers claim lenders will negotiate discounts of about 200 basis points off the standard variable rate to attract a new borrower and 120-150 basis points to retain an existing borrower.

The accompanying table compares packages from the big four, including additional fees and costs, plus the banks’ lowest variable rates. Annual fees that range from $120 to $395.

“Savings from the offset account should generally cover fees,” says Foster-Ramsay.

Tougher to borrow

The prudential regulator’s serviceable buffer of 3 per cent is also affecting borrowing capacity. It means a borrower with a 4 per cent mortgage will have their capacity to pay assessed by a lender at 7 per cent.

“Property buyers have been affected negatively because interest rate rises have not kept pace with price falls,” says AMP’s Oliver. “This means their borrowing power has been lowered, but house prices remain elevated,” he says.

Agents claim it is a growing issue for buyers who need to borrow to their maximum borrowing limits.

“Typically upgraders and investors have some equity under their belt,” says buyers’ agent Bakos. “Those who need to borrow to their capacity are under growing pressure as rising rates could reduce their budget,” she says.

Investors continue to be attracted by rising rental yields as vacancy rates tighten across the country, say agents.

Sydney’s combined rents rose by 17.5 per cent during the past year, Brisbane by 19 per cent and Melbourne about 15 per cent, according to SQM Research. Investors’ share of new mortgages jumped early in the year as many sought an alternative to volatile stockmarket investments, say agents.