Australian house prices: The three cities tipped to lead gains this year – The Australian Financial Review

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Perth is tipped to post house price gains of up to 16 per cent this year – with Brisbane and Adelaide not far behind – as the surging demand for housing in more affordable cities outstrips the supply of homes, according to The Australian Financial Review’s quarterly property survey.
Across the nation, the housing rebound is proving resilient despite higher borrowing costs, and a panel of 10 experts tips median growth of 5 per cent nationally. The price gains are expected to be more subdued in Sydney (between 4.5 per cent and 9 per cent) and in Melbourne (from flat to 4 per cent).
The endurance of the rebound is remarkable, amid receding hopes for interest rate relief this year as the Reserve Bank maintains the fight against sticky inflation with tight monetary policy. Led by the smaller capitals, the national outlook for house prices has become more bullish since the previous December survey, when experts tipped median growth of 4 per cent or lower for this year.
“House prices have proven to be remarkably resilient in the face of a rapid and large tightening cycle,” Barrenjoey chief economist Jo Masters said.
“Indeed, the long-held relationship between borrowing capacity and house prices has broken, as high interest rates have reduced borrowing capacity, but house prices have continued to rise.”
That resilience is especially apparent in Perth, where strong migration, both foreign and interstate, coupled with a very affordable market, is fuelling the price gains. As in the other capital city markets, the limited supply of new and existing housing underpins that growth.
Nerida Conisbee, chief economist at Ray White, said “significant wealth creation” was driving up prices in Perth’s most expensive suburbs while in the more affordable suburbs, it was “cheaper to buy than build”.
“Perth’s outer suburbs were incredibly cheap and a lot of it had to do with high levels of building over a prolonged period. This building isn’t taking place [now] and the ones that are being built are costing a lot more,” she said.
The panel of property analysts and economists expects gains of up to 10 per cent or more this year in Adelaide and Brisbane.
“Prices in the fastest growing markets, Perth and Adelaide, remain well below other cities and look to have further upside in the near term.” Knight Frank chief economist Ben Burston said.
“The exact timing of rate cuts is less important than the perception that they will occur at some point by mid-2025, but if confidence in this outlook is undermined by ongoing high inflation, then the pace of growth will slow significantly.”
The price gains have been solid this year, up 1.6 per cent for the March quarter nationally, according to CoreLogic. In Perth, prices have risen 5.6 per cent in the first three months, and in Sydney, they are up 0.9 per cent.
So what is driving the market? Ms Masters said housing finance figures showed the type of buyer in the market was shifting in favour of higher quality borrowers, who were purchasing on relatively low loan-to-value and debt-to-income ratios. They were buying in a market where total listings were below the five-year average, especially in Brisbane.
Australian National University associate professor Ben Phillips said upgraders and investors were facing less competition from first home buyers.
“Short-term lack of new supply in the market and a strong rental market are pushing up prices while elevated interest rates take some pressure off the market,” he said.
Upgraders and downgraders constituted the second and fourth-largest segment of the market, CBRE’s research head, Sameer Chopra, said.
Eleanor Creagh, a senior economist at PropTrack, said existing homeowners were benefitting from years of strong price growth, accumulating equity gains on their homes.
“This has insulated them from the higher interest rate environment with many using equity gains to upgrade. Purchasing activity from these existing owners is one factor that has aided the resilience of home buying demand over the past year, despite affordability having significantly deteriorated.”
Several panellists polled by the Financial Review noted the constraint on price growth wrought by affordability problems.
Domain research chief Nicola Powell – who expects Sydney house prices to gain between 7 per cent and 9 per cent – said the supply shortfall was putting upward pressure on the housing market.
“However, stretched affordability will limit the pace of price growth. That is until we see improved borrowing capacity and lower debt costs, which could lead to greater price momentum,” Dr Powell said.
Jarden senior economist Carlos Cacho said that affordability, especially in Sydney, was becoming “a major inhibitor to material price growth, particularly for middle to lower-income buyers”.
Maree Kilroy, a senior economist in Oxford Economics Australia’s property and building forecasting team, expected prices to rise 4.8 per cent in Sydney, 12.7 per cent in Perth and 2.2 per cent in Melbourne. She said affordability had deteriorated, which would restrict the pace of growth, especially for houses.
“In response, we expect price momentum to fade modestly mid-2024, but only temporarily,” she said.
Last month, Fitch Ratings reported that mortgage arrears were rising, caused by a combination of high rates and the dwindling buffer provided by household savings. That pressure on borrowers prompted warnings from SQM Research founder Louis Christopher and AMP chief economist Shane Oliver about the prospects of distressed selling.
“Distressed selling is likely to rise over the next six months as saving buffers built up through the pandemic are run down, a slowdown in the jobs market makes it harder for stretched homeowners to boost their income by working extra hours and as opportunities to further cut discretionary spending are exhausted,” Dr Oliver said.
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