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Published: Dec 12, 2023, 1:08pm
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The higher cost of borrowing and a lack of available houses on the market may have hampered home buyers throughout 2023, but it hasn’t significantly slowed demand and the growth in property prices.
“It was a surprise, given that it was largely expected to be the year that rapid rate hikes continued to hit housing demand and would impact price growth negatively,” said Dr. Nicola Powell, Domain’s chief of research and economics.
In 2023, house and unit prices grew steadily in every month throughout the year, with a national annual growth rate of 5.42% (and 6.54% in capital cities) according to recent data from PropTrack. The main drivers include increased immigration after Covid and stronger demand for established homes due to the construction industry facing higher costs and less capacity.
A change in momentum may be on the horizon. While most experts believe demand for housing will continue to outstrip supply, Australia’s high cost of living will keep biting—leading to weaker price growth and mixed results across different parts of the country.
Powell said this year’s growth cycle was in defiance of the 13 rate hikes enacted over 2022-2023 that brought the official cash rate to 4.35% by year’s end.
“What subsequently unravelled over this past year was a reverse of expectation that defied logic—as a shortfall of housing supply collided with rapid population growth, a strained construction sector and the tightest rental market on record—and Australian property prices rose.”
She expects continued growth in house and unit prices into 2024 of between 5% to 7%, but warns of “an intricate dance of economic forces influencing the property price in Australia”. Upward price pressure could come from continued population growth and undersupply, counterbalanced by financial stressors facing buyers that could weaken demand.
Economic forecasts for 2024 include modest GDP growth, the continuation of a tight labour market, and a gradual slowdown in inflation, with many pundits predicting rate cuts to begin from late 2024.
Head of research at CoreLogic, Eliza Owen, anticipates a year of two halves, with 2024 starting with weaker performance as people wait to see how the RBA moves on the cash rate.
“However, if the second half of 2024 sees a reduction in interest rates, there could be a slight recovery in buyer demand,” she said.
“This year of two halves could ultimately balance out to a modest growth rate over the calendar year.”
Upward price pressure could come from continued population growth and undersupply, counterbalanced by financial stressors facing buyers that could weaken demand
Owen said the problem of stretched budgets frustrating some buyers wouldn’t be quickly solved, with rate cuts not likely to be substantial enough to bring down the portion of mortgage payments to household income within comfortable levels.
“We estimate mortgage rates would have to decline 146 basis points to bring serviceability down to 40% of median income for the median dwelling value, and 410 basis points to bring serviceability down to 30% of income,” she said.
“So affordability will continue to be a challenge for buyers in the year ahead.”
The average property price increase forecast across the four major banks is 4%, with Sydney, Brisbane and Perth expected to experience slightly higher growth
According to Owen, growth is already slowing across some capital cities, with evidence of a weakening in home values and more supply coming to market in Sydney and Melbourne.
“In both cities, the high end of the market has shown a slowdown, and Melbourne home values actually fell -0.1% in November.”
She noted that performance is particularly divergent right now.
“While Sydney and Melbourne are weaker, growth rates across Perth, Adelaide and Brisbane remain high, at above 1%,” she said.
“Generally these cities are relatively under-supplied from a listings perspective, so they would continue to increase through to the end of this year at the very least, and might see a slowdown in growth through the start of 2024.
Owen said when looking at current market dynamics, “the easy picks for out-performance in 2024” were Perth and Adelaide, and to a lesser extent, Brisbane.
“Advertised stock levels are 30-40% lower than the historic five-year average, in Perth and Adelaide sales volumes are 25% higher than the historic five-year average, and feasibility for new development projects seems extremely constrained until interest rates move lower.”
Domain is predicting the strongest increases in house prices in Sydney (7% to 9%), Brisbane (7% to 8%), and Adelaide (7% to 8%). Locations where unit prices are set to increase more strongly include Brisbane (4% to 6%) and the Gold Coast (4% to 5%).
NAB’s residential property survey for the third quarter of 2023 found that fewer first home buyers (FHBs) were entering the market—with first-time buyers purchasing new housing falling to a near eight-year low of 30.3%.
However, the survey found: “The market share of sales to resident owner-occupiers (net of FHBs), however, continued to grow in Q3, reaching a near 11-year high of 41.8%. Domestic investors also played a bigger role, with their market share increasing to 16.5%—though still well below levels seen prior to the start of the current interest rate cycle.”
Foreign investment in the Australian new housing market increased for the fourth straight quarter to 10.1% (4.1% for established houses), driven by more foreign buyers snapping up properties built in New South Wales and Victoria.
Owen said the market wasn’t promising for first home buyers, with the latest affordability metrics showing Aussies need to dedicate a near-record 46% of a median income towards servicing a new mortgage, and rent values remaining high (but expected to slow in 2024).
“However, that does not mean there’s no opportunity for first home buyers. Softer market conditions through the start of next year would enable some wealthier first home buyers into the market,” she said.
“There are also pockets of Sydney and Melbourne where market conditions are loosening, and listings volumes are rising, potentially as a result of mortgage stress. These tend to be areas on the periphery of greater metropolitans.”
Domain also predicted urban spread and gentrification of overlooked suburbs in 2024 as more buyers chase affordability—a trend they expect to be supported by the Australian Government’s ‘Help to Buy’ program that will offer eligible buyers an equity contribution of up to 40% for new homes and 30% for existing properties.
Understandably, sentiment among prospective Aussie buyers isn’t great. The Westpac-Melbourne Institute Consumer Sentiment for November 2023 indicates deep pessimism—more people are wary of further rate rises, expecting to live more frugally in 2024, and don’t think it’s a good time to buy a house.
Image source: PinPoint Macro Analytics, Housing Snapshot December 2023.
Positive, yet modest growth in Australian property prices is expected in 2024. It will largely depend on the country’s progress in its fight against inflation, and how that impacts the trajectory of interest rates and therefore, the cost of borrowing.
Forecasts are for housing prices to return to stable levels of growth in 2024, but the extent of the slowdown may depend on how inflation tracks and whether anticipated interest rate easing from the second half of 2024 eventuates.
Investor borrowing has been growing throughout 2023, more strongly than owner-occupiers. Eliza Owen from CoreLogic said: “Investors largely operate on a capital growth strategy in Australia, with the majority of investors likely being negatively geared at this point in the rate cycle. What this means is that any sign of asset value increases, including from reduced interest rates, could entice more buyers into the market.”
There was a huge increase in Australian house prices that kicked off during the pandemic, when prices surged over 20% to 30% year over year in some areas. After a decline in 2022, some parts of the market have recaptured those Covid-era gains during 2023. Across Australia, ABS data shows that in 2020 the average house cost $678,500 and in 2023 it’s now $925,400.
That means that within a three-year span, the mean property price jumped more than 36%. While that’s an unusually large and anomalous increase, property prices in Australia are broadly trending upwards. In the 30-year span from 1992 to 2022, housing prices increased 382%, rising by 5.4% annually on average. In that context, current price rise forecasts put the property market back on a more even keel.
Jody McDonald is a freelance writer based in Brisbane who specialises in writing about business, technology and the future of work. She’s helped a range of SaaS platforms and tech companies share their stories, and has written for the Mortgage and Finance Association of Australia magazine, MYOB Pulse, Anthill Magazine, Crypto News Australia and The Chainsaw.
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