House price gains have continued to soften into the new year with multi-speed conditions emerging across the country as housing markets begin to deviate.

Across 2021, residential property prices surged by 22.2 per cent—the largest annual increase since 1989—fuelled by ultra-low interest rates, high household savings, government stimulus and low listings.

All capitals posted healthy yearly gains, but the markets have started to diverge, as poor affordability and a flood of listings dampened growth in Sydney and Melbourne, while the smaller and cheaper capitals have powered ahead.

Brisbane, which posted the strongest gains over the year, finished the year with a 27.4 per cent rise—the largest annual growth in 18 years.

The city’s house prices, in particular, climbed by a whopping 30.4 per cent or $253,292 over the year.

Sydney, the nation’s second strongest market, notched up a 25.3 per cent jump in dwelling values—the fastest yearly increase since 1988.

However, a surge in freshly advertised listings through December had been a key factor in removing some momentum in Sydney’s price growth, along with some demand headwinds caused by significant affordability constraints and negative interstate migration.

Adelaide, which surged by 7.2 per cent in the final quarter of the year, remains unhampered by affordability issues with advertised stock levels remaining low and demographic trends supporting housing demand.

Change in dwelling values

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Corelogic research director Tim Lawless said Brisbane and Adelaide, along with regional Queensland, were the only broad regions where there was no evidence of value growth slowing, with the monthly rate of growth hitting a new cyclical high in December.

“These regions show less of an affordability challenge relative to the larger capitals, as well as better support for housing demand with Queensland in particular showing strong interstate migration,” Lawless said.

“Additionally, we haven’t seen the same level of supply response seen in other regions, with the trend in advertised supply remaining well below average in these markets.”

By contrast, disruptions to interstate migration caused by extended closed state borders have continued to negatively impact Perth’s housing demand with the city recording the weakest growth across 2021 at just 13.1 per cent.

Melbourne’s housing market, which has been attempting to claw its way back following a world record lockdown, lost some steam over the month of December to finish the year at a 15.1 per cent gain.

Fresh listings hold the key to housing demand

While stock levels have generally been low, the total number of home sales in 2021 was approximately 40 per cent above the decade average.

Approximately 653,000 house and unit settlements were conducted over the calendar year, the highest number of annual sales on record.

Currently, homes are selling 23 days earlier than anticipated with minimal negotiation on advertised prices as auction clearance rates hold high between the 70 per cent to early 80 per cent range.

Looking ahead, Lawless said the astronomical growth rates seen across the year were now expected to plateau as market forces that powered the housing boom begin to lose their strength.

“Such a significant mismatch between available housing supply and the level of demand is a fundamental reason why housing prices have risen so sharply over the year,” Lawless said.

“As stock levels normalise and affordability constraints along with tighter credit conditions drag down demand, it’s reasonable to expect growth conditions will be more subdued in 2022.”

All eyes on rates hike

While record low mortgage rates below 2 per cent have fuelled the property frenzy the Reserve Bank of Australia has stated it will not lift the cash rate until inflation reaches 2 to 3 per cent target range.

AMP Capital chief economist Shane Oliver told The Urban Developer further tightening in lending standards and rises in interest rates would put further pressure on house prices growth after the pandemic had “broken the back” of a 30-year trend towards lower inflation and lower interest rates.

“For 2022, this likely means higher mortgage rates and combined with a deterioration in housing affordability this will mean slowing and then, by the end of 2022, falling home prices,” Oliver said.

“For the longer term, the impact of an end—and possible reversal—to the tailwind for property prices from falling mortgage rates, combined with the work from home phenomenon driving relatively less demand for city property, means that the property bull market since the mid-1990s may be coming to an end potentially driving improved affordability.”

Oliver said home prices were poised to grow by just 5 per cent this year and likely to fall by up to 10 per cent in 2023.