Property Market Update – June Edition

How will the Australian real estate market look in 2023 and beyond?

Have our real estate markets hit rock bottom? When will the rates on loans stop going up?

People are asking these kinds of questions often now that home prices have been going up for a few months.

Well, it’s becoming more and more obvious that our housing market has surprised everyone and moved past the bottom of the cyclical slump. Not only are home prices stabilizing or going up in most parts of the country, but several other signs also show that things are getting better, and this trend is only getting stronger and more widespread. Strong, almost boom-like results are being seen at auctions, buyer confidence has gone up, and home sales are moving toward the average of the last five years.

Each state is in a different stage of the real estate cycle, and within each capital city, there are different markets where property values are still going down or staying the same. However, there are many places where housing values are now going up. CoreLogic reported that 35% of suburbs have seen their real estate values go up in the last few months. Given the volatility of property prices in Australia, it is important to consult an accountant or financial advisor.

Their expertise can help you navigate the market, assess investment risks, and make sound financial planning in this dynamic landscape. Join us as we embark on this insightful journey into Australia’s property market, unraveling its intricacies, exploring emerging trends, and discovering the untapped potential that lies within this fascinating and ever-evolving sector.

Image: Property price changes around Australia (Source: CoreLogic 1st June 2023)

What’s Causing Property Prices to Change?

House prices are affected by many things. There is a lot of demand for housing due to a rise in migration and the return of foreign students. It is thought that an extra half a million people will have to find a place to live in Australia in the next two years. This increase in population is making it harder for locals to find a place to rent, which is driving up rent and affecting property prices.

On the other hand, the growth in the number of homes is going down, and building permits for new homes are at their lowest level in a decade. These problems are making it harder for the number of new homes to increase. The construction industry is struggling with rising prices and a lack of workers, leading to the failure of several small and medium-sized construction companies. And building costs have gone up by more than 25% in the past two years. Builders are passing these costs on to homebuyers, which is directly affecting house prices.

At the same time, wages have gone up, and the unemployment rate has stayed at a 50-year low. This has led to strong family incomes. This financial security allows homeowners to keep buying homes even when interest rates go up. Once interest rates and inflation rates go up, buyer confidence will return and the market will reset as a new property cycle starts.

But in the short term, house prices are not going to go up by a lot. As long as interest rates stay high and unemployment rates might go up in 2023, the positive effects of demand and supply problems will be limited. Prices are expected to rise by about 2% across the country by the end of 2023. But as the Reserve Bank of Australia (RBA) might cut interest rates before the end of 2023, demand pressures will help create a good situation for property prices. As a result, prices are likely to rise by 10% through 2024 and into early 2025. Even though this seems like a big rise, it just means that price drops from the peak in early 2022 will end by the end of 2024 or early 2025.

So, Have Property Markets Hit Rock Bottom?

In Dr. Andrew Wilson’s My Housing Market, he said that the national housing market is still getting better and that house prices have been going up for four months in a row. According to Dr. Wilson, the national capital city’s quarterly median house price went up by 0.9% from April to May, rising to $1,031,753. CoreLogic’s national Home Value Index showed a third straight monthly increase, with the rate of growth speeding up to 1.2% in May.

After hitting a bottom in February, the value of homes went up by 0.6% in March and 0.5% in April. Sydney’s prices went up by 1.8% over the past month, which was the city’s biggest monthly gain since September 2021 and a sign that the economy is getting better. According to PropTrack national home prices went up by 0.33 percent in May as the recovery picked up speed. This makes prices 1.55% higher than they were in December 2022, when they were at their lowest.

There isn’t just one property market, of course. Each state is in a different stage of its real estate cycle, and within each state, there are many different submarkets. This is because interest rates, the cost of living, and our economic problems affect each section in a different ways. For example, the wealthier areas of Sydney, which were the first to go down just over a year ago, are now the first to go back up.

What’s Going On With Property Prices in Australia Right Now?

The following tables show the summary of property market values:

Source: CoreLogic

The national measure of home values recorded a one-third consecutive rise last month, with the pace of growth accelerating sharply to 1.2%. After finding a floor in February, home dollies nationally have increased by 2.3% in the three months to May, following a 9.2% drop.

Source: CoreLogic

Sydney continues to lead the recovery trend, posting a 1.8% lift in values over the month. That’s the largest monthly gain since September of 2021. Brisbane and Perth were the only other capital cities to record a monthly gain of more than 1%. However, the rise in values through May was broad-based, with the rate of growth accelerating across every capital city. The positive trend is a symptom of persistently low levels of available housing supply running up against rising housing demands.

According to CoreLogic, advertised listings trended lower through May, with roughly 1800 fewer capital city homes advertised for sale relative to the end of April. Inventory levels are 15% lower than they were at the same time last year, and 24% below the previous five-year average for this time of the year. Amid increased competition, auction clearance rates have trended higher, holding at 70% or above over the past three weeks for private treaty sales.

The trend in regional housing values has also picked up, with the combined regional index rising in May following a 0.2% and 0.1% rise in March and April. Although regional home values are trending higher, the rate of gain hasn’t kept pace with the capital cities. Over the past three months, growth in the combined capitals index was more than triple that of the combined regionals, at 2.8% and 0.8% respectively.

Although the advertised housing supply remains tight across regional Australia, demand from net overseas migration is less substantial. Historically, regional Australia accounts for around 15% of Australia’s net overseas migration. And additionally, a slowdown in internal migration rates across the regions has helped to ease the demand.

                             Source: CoreLogic

Premium housing markets in Sydney continue to lead the recovery trend. After recording a larger drop in values, Sydney’s most expensive quarter of the market stands out with the highest rate of growth gaining 5.6% over the past three months compared with a 2.6% rise in the more affordable lower quartile values. Interestingly, buyers targeting the premium sector of the market are still buying at well below peak prices.

Although values across more expensive homes are rising more rapidly. At the end of May, dwelling values across Sydney’s upper quartile remained almost 12% below the January 2022 peak. That’s the equivalent of a saving of around $213,000 from the cyclical high.

Source: CoreLogic

The same can be said for other housing markets. In fact, despite the recent gains, most capital city markets are still recording housing values that are well below recent peaks. Perth is the only capital city where dwelling values have returned to record highs. At the other end of the spectrum is Hobart, where values remain the lowest relative to the city’s recent cyclical peak in May last year, down -12.6%. With selling conditions improving, we could see more homeowners test the marketplace. It will be interesting to see if more vendors take advantage of the improving housing market conditions and look to beat the spring rush when competition to sell could be more intense.

In Sydney home values have increased by 4.8%. The number of home sales across Sydney was estimated to be 10% below the five-year average over the three months ending May. Demonstrating a gap between supply and demand levels, with buyers feeling a renewed sense of urgency, auction clearance rates have been holding above 70% through May.

On the other hand, Melbourne home values remain at 8.2%. A key factor placing upwards pressure on Melbourne home values is the low level of available supply. With demand rising and stock levels tight, selling conditions have also picked up, with auction clearance rates holding around the 70% mark since mid-April.

Brisbane’s housing market is facing a 1.4% lift in values through May taking the recovery trend. With supply being outweighed by demand, selling conditions have picked up. Clearance rates have held well above average through May.

Adelaide housing values were up 0.9% in May, with the market up 1.2% since March. Adelaide home values were only slightly off record highs, reflecting only a relatively mild downturn in values through the interest rate hiking cycle to date. Relatively affordable housing prices, especially for Interstate buyers and tight stock levels, are key factors supporting the upwards pressure on values.

What Will Happen to Property Markets in the upcoming Months of 2023?

1. 2023 will be remembered as the year when the real estate market started a new cycle. I think of the year 2023 as a year with two parts. During the first few months of the year, home prices fell even more. However, prices have since stabilized and are now going up for houses and units all over Australia.

But overall, our markets aren’t doing so well. This is partly because consumers aren’t as confident as they used to be and a big part is because of problems with cost. In short, buyers need more money to buy a home, but they can’t borrow as much as they could when interest rates were lower. And the rising cost of living and inflation makes it harder to save for an investment.

So it’s easy to see why things have been getting worse, right?

But that’s not all.

There has been a shift and rotation in spending from goods back to services, and consumer and home buyer confidence has dropped because of worries about rising rates, inflation, and the future of property values.

2. Still, there are a lot of people who want to buy property. Even though many things affect property values, the main things that cause property prices to go up are customer confidence, easy access to credit, low-interest rates, economic growth, and a good balance between supply and demand. The most recent numbers show that more than $28 billion in loans were accepted last month. This means that new buyers on the market have a budget of more than $30 billion.

Strategic investors, on the other hand, aren’t worried about this part of the cycle. They know that real estate is a long-term game, and they’re more interested in the long-term rise in value than in short-term drops.

As long as the RBA keeps tightening quickly to stop inflation from rising, prices are expected to keep going down a little. Even though fixed rates have already gone up a lot, the sharp rises in the cash rate are now being passed on to variable mortgage rates. This is raising minimum payments by a lot and making it harder to borrow money.  On the other hand, a strong economy, the return of immigrants, a drop in unemployment, higher wages, and a rise in exports will all help.

3. The property market will be further fragmented. The current property boom was not typical. The worth of almost every type of property in almost every part of the country went up by a lot. In the future, the property market will be much more split up. But there was never really just one housing market in Sydney or Melbourne. There are markets within markets. There are houses, apartments, townhouses, and villa units in the outer suburbs, middle ring suburbs, inner suburbs, and the CBD. All of them are acting differently.

If you think about it, some groups of people will find that the rising cost of living due to inflation and higher rents or higher mortgage costs at a time when wages aren’t keeping up with inflation will either stop them from getting into the property markets or severely limit their ability to borrow.

In other words, there won’t be much reason for property values to rise at the lower end of the market. So, I would only invest in places where people’s incomes are growing faster than the average for the country. Many of these places are the inner and middle-ring suburbs of our capital towns, which are getting better as these wealthier groups move in. There are great chances to invest in houses and townhouses in these suburbs.

4. Investors will keep getting into the property market, and they will make it harder for people to buy their first house. As rents go up and the number of people buying their first home goes down, smart owners with a focus on the long term will come back to the market. Investor lending has been low over the last few years, but with historically low-interest rates and fewer limits on lending, investors are back with a vengeance. Last month, the number of investor loans that were accepted went down a little, but investors still got $9.3 billion in new loans.

5. Rent prices will go up quite a bit. Australia is in the middle of a rental disaster, and the situation isn’t likely to get better until 2023. Since there aren’t many empty apartments and the number of people looking for renters is going up, rents will keep going up over the next few years.

Then, as the borders open up even more, there will be even more people looking for places to rent. If you think about it, most people rent when they first move to a new country or area. SQM Research shows that there are only about 33,000 empty homes in Australia. Where are the 200,000 new refugees going to live? And because rising house rents will make it hard for many renters to buy their homes, apartment rents will also go up in 2022.

Feel free to contact an accountant or financial advisor who offers valuable expertise and insights on property market updates, enabling individuals to make informed decisions, maximize returns, and manage risks effectively.