Three months ago, Geetha Pandey, an Australian citizen in her forties who lives in Malaysia, was looking to buy a two-bedroom flat in Paddington, a suburb near central Sydney, with her husband.

It was their favoured area for a rental investment. Oxford Street, its main thoroughfare, is densely packed with shops, bars and nightclubs, and boasts a thriving LGBT scene. The city’s central business district, most of its theatres and galleries, the Opera House and Harbour Bridge are within a few minutes’ taxi ride.

Two equivalent flats in the block had sold in late 2021 for A$1.42mn and A$1.4mn ($985,000 and $971,000 respectively). But on the day of the auction, a popular sale method in Sydney, Pandey’s bid of A$1.37mn was the highest. It was less than the auction reserve price (which is disclosed to the auctioneer but not to bidders) and the seller initially refused it.

“They rung up that night asking us to increase the price. But we were clear about what we wanted and our budget. We had our [mortgage] pre-approvals with an Australian bank in place. So, we said no,” says Pandey. The seller, reluctantly, agreed to their offer.

Harder bargains driven by buyers like Pandey are becoming more common in Sydney as prices fall. The median sale price for a home dropped 1.5 per cent between January and May, after increasing 25.5 per cent in the previous 12 months, according to the index of CoreLogic, a property data provider.

Successful auctions are becoming rarer. They have long been the preferred option for Sydney sellers, who believe that competing buyers bidding against each other will result in the highest price. Busy auctions — typically conducted in front of the house with bidders and spectators spilling out on to the pavement or road — have become a staple of Sydney weekend street life.

But today, fewer achieve a price accept­able to the seller. In the week to June 11 2021, 70 per cent of homes listed for auction actually sold, according to Domain.com.au, a property website. In the week to June 11 2022, that had fallen to 51 per cent.

“Last year at auction some homes were getting 20 per cent higher than buyers were expecting. Not any more,” says Munro Donen, of Propertybuyer East, a local buying agent, who represented Pandey in her purchase.

Donen specialises in Sydney’s eastern suburbs. The popular residential neighbourhoods stretch south and south-east from the centre, within an easy drive of it and the international airport. They have a plentiful supply of period and new homes and many of the city’s celebrated restaurants.

Several of them, including Bondi, Coogee and Maroubra, are home to famous beaches; for years, houses with ocean views have attained some of Sydney’s highest prices. The average price of a house in the eastern suburbs in May was A$3,563,505, more than double the citywide average of A$1,403,964, according to CoreLogic.

But median prices in the eastern suburbs have fallen 3.9 per cent since January, also according to CoreLogic. “I’m getting more calls from sales agents asking for [my clients] saying they don’t have the level of inquiries from buyers,” says Donen, who adds that increasingly sellers who fail to sell a home at auction are going with offers they had previously refused.

Meanwhile, some buyers are ending up with more than they thought they could afford. In March, Charlotte, who is retired and who declined to give her real name, bought a home with her husband in Randwick, an eastern suburb just inland of Coogee Beach and bordered on its north by Centennial Park, which contains 189 hectares of sports fields, gardens and wetlands.

Beginning their online search late last year from Perth, from where they were relocating to be closer to their daughter and her family, the couple were preparing to settle for a cramped modern apartment as their new Sydney home. “For our [A$3mn] budget we worked out that we weren’t going to get much. The older buildings needed lots of renovation. In the new ones there wasn’t much room to swing a cat,” she says.

“We were expecting 10 people bidding for one house and if you didn’t have your money there on the table you lost out. Instead, when we arrived in Sydney, we could see that homes were sitting and not moving,” she says.

Eventually, they bought a four-bedroom townhouse, after its auction was cancelled because of lack of interest, for A$125,000 less than the initial listing price.

Rising interest rates are an important element of Sydney’s slowdown. Since May, rates have increased from 0.1 per cent to 0.85 per cent, including the biggest rise in 22 years in June.

Analysts are predicting steep rises before the end of the year, with Goldman Sachs forecasting interest rates will hit 2.6 per cent by then. CoreLogic estimates that a 1.75 per cent rise in rates from their low in May would increase the payments on a A$1.5mn mortgage offered on the average variable rate from A$5,857 to A$7,084 a month.

Commonwealth Bank of Australia, the country’s biggest lender, predicts average house prices will fall nationwide by 15 per cent by the end of next year.

Already, the cost of borrowing is increasing. Lisa and her husband, who are in their fifties and declined to give their full names, bought a home earlier this year for more than $2mn in Kingsford, another popular eastern suburb, in part to be closer to their two sons’ schools for the school run. Between the day they received their A$1.5mn mortgage offer in principle and when their actual mortgage was in place three months later, their mortgage repayments increased by A$300.

The couple’s experience selling their previous home in Botany, a southern Sydney suburb near the airport, illustrates how quickly the local picture has changed. In the two weeks before the auction of their home in December, three comparable homes in the same development had sold either at auctions or before the auction for more than the price given as a guide.

“But our auction was an abysmal failure, people weren’t bidding anywhere close to what we wanted,” says Lisa. A few weeks later, she received a private offer for close to her reserve price, and accepted it. “Since then, another comparable home has been withdrawn from its auction. They can’t sell it,” she says.

Other prospective buyers are pausing their search, hoping prices will fall further. Earlier this year, Nikki Greenberg, 29, was looking for her first flat, having returned home from a period working in the US. “There was so little supply. And when I attended open houses, I realised I was competing with overseas buyers, with investors, with the bank of Mum and Dad. It was so hard,” she says.

But in recent months she has seen fewer people at the viewings she has attended; the sales agents showing her round tell her buyers are willing to negotiate — something she never heard in January or February. So she has decided to pause her hunt, instead renting an apartment in Potts Point, an area just north of Paddington. “I’m going to see what happens in the next six to 12 months.”

What you can buy . . .

Zetland, guide price A$640,000-A$670,000

A one-bedroom apartment in an inner suburb about 4km south of the central business district. The flat has timber floors, an open-plan kitchen/living area and a dual aspect east-facing balcony. On the market with Morton Green Square.

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Randwick, guide price A$3mn

A three-bedroom bungalow in Randwick, an eastern suburb 2km inland from Coogee Beach. The house has an open-plan living/dining area, a study and attic storage. Outside, there is a deck with awning and a garden with mature plants. For sale with Raine & Horne Double Bay.

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Paddington, guide price A$3.5mn

A four-bedroom, three-storey house in Paddington. The ground floor has ceiling heights of up to 3.2 metres with a skylight above the kitchen/dining area. The main bedroom opens on to a balcony, while another opens on to decking. Listed with PPD Real Estate.

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