One good year likely to follow another......

2023 was a year of almost continuous property price increases across Australia. Nationally, Australia’s property values rose 8.1 per cent, while Sydney’s prices rose 11.1 per cent in the year to December despite five further interest rate rises that would usually have pushed prices downwards. 

Many economists at the start of the year had forecast falls of up to 15 per cent but the opposite happened. Properties that were hit during the market’s downturn have mostly returned to their earlier pandemic ‘boom’ peak prices or gone even higher during 2023. 

Westpac senior economist Matthew Hassan said the turnaround in prices was completely unexpected because it defied what were seen as basic economic principles: “You’d be hard-pressed to find another example of continued momentum in house prices in the face of interest rates rising at the rate they did,” he said. “It really caught people by surprise.”

(Incidentally, there is one official set of land value calculations that does show values falling in 2023, and that’s the prices compiled by the NSW Valuer-General which show a decrease of 1.6 per cent in the year to July. These are based on data captured in the second half of 2022 and the first half of 2023 when there was a decline that followed two years of very strong prices growth, so these values reflect a statistical methodology and not the current market.)

Australians got collectively wealthier in 2023 thanks to property. Total household wealth rose by $339 billion, or 2.3 per cent, in the September quarter, to a record high of $15.3 trillion, or more than $575,000 per person. The improvement was driven largely by the property sector. The value of Australians’ homes and land jumped by $250 billion in the quarter to a record $9.9 trillion. The previous record of $9.7 trillion was set in early 2022.

It’s ironic that the recovery in the property market has taken Australians’ wealth to record levels, but data from the Australian Bureau of Statistics (ABS) shows that for the first time since the Global Financial Crisis households are spending more than they earn.

St George Bank senior economist Pat Bustamante told The Herald’s economist, Shane Wright, that during the September quarter, households spent $1.4 billion more than they generated in income. The last time this occurred was in the September quarter of 2008.

He said to make up for the income shortfall, households increased their borrowings and were in effect “pawning the family silver” to make ends meet: “Elevated cost-of-living pressures, a higher tax take due to bracket creep, and higher interest rates have seen households dip into savings,” Bustamante said.

CoreLogic’s head of research Eliza Owen said 2023 was certainly unusual: “It’s pretty extraordinary to see values get to a new record high despite further uplifts in the rate-hiking cycle. At the start of the year, the market was a lot more exuberant. There was a lot more hope the cash rate would peak at a relatively low level and buyers were really taking advantage of the dip.

“A lot of wealthy buyers saw it as a great buying window. But as we got towards the end of the year, it’s clear the more affordable end of the market emerged as the more resilient and popular amid interest-rate constraints that are much higher than what we thought they would be.”

The year 2023 ended well. House prices have jumped by more than 5 per cent in one out of nine Sydney suburbs over the last three months of the year, even defying the recent slowdown in the market, data from CoreLogic shows.

CoreLogic figures also show that suburbs in Sydney’s inner west and inner south-west dominated the top-performing house markets in the city as buyers looked for properties offering good value for money and those with development potential,

What will happen in 2024

After the climb upwards in 2023 there’s an expectation of some sort of pullback in 2024, noting that price falls early in the new year aren’t yet on the agenda. Buyers are going over new listings with more care than a few months ago, which means properties are staying on the market longer than they were last October. However, Sydney’s prices are holding onto their 2023 gains and there’s still a housing crisis that governments have yet to deal with.

Taxation and accounting firm Quantiphy says to predict what happens in 2024 depends on whom you ask: “According to Domain analysts, prices could climb a sizeable 7-9 per cent in Sydney next year. Nationally, they’re tipping house prices to rise 5-7 per cent. These numbers are in line with Domain’s earlier predictions in their Forecast Report published back in June.”

Domain interprets the Sydney auction clearance rate’s recent slippage as signs of a shift towards a more balanced market where buyers and sellers can compete on a more equal footing than one that’s skewed against buyers. 

Clearance rates in Greater Sydney’s outer south-west, Sutherland, Baulkham Hills and Hawkesbury, Central Coast and Outer West and Blue Mountains recorded clearance rates below 60 per cent in early December meaning buyers have more choice and less competition.

Quantiphy said the SQM forecast is much more humbling. “According to SQM’s annual ‘Boom & Bust’ Report, house prices are predicted to fall in five capital cities [in 2024], including Sydney. If interest rates continue to rise and migration slows, SQM anticipates a -6 per cent price correction in Sydney, or a rise of 3 per cent if rates stay put and migration continues to increase rapidly.”

AMP chief economist Dr Shane Oliver also sees a five per cent price fall in Sydney through 2024: “It looks like we’re now starting to move through the peak in immigration … and while there will still be shortfall in housing, I think we’re banging up against affordability constraints both in terms of rents and prices [which prompts households to consolidate and helps ease demand],” he said.

“The combination of constrained buyers and some further pick up in supply [as more distressed listings occur], will pull prices down.”

We reported last month that PropTrack has already predicted a 5 per cent increase in 2024 thanks mostly to ongoing property market stock shortages. A tight rental market with continually rising rental costs will help keep upward pressure on prices. 

PropTrack figures also show that the rate of prices growth in Sydney contracted in November to just 0.3 per cent – its slowest rate of growth since December 2022. In another sign of a slowing market, Sydney’s auction clearance rate fell from a peak of 73 per cent in May to 64 per cent in November.

Tim Lawless, CoreLogic’s research director said that predicting 2024’s price trends won’t be easy.
“My best guess would be that rate hikes are probably done,” Lawless said. “We’ll probably start to see some growing speculation of rate cuts through the second half of the year.”

CoreLogic head of research Eliza Owen, sees signs that high housing costs are going to reduce demand in 2024: "Housing activity rebounded through early 2023 as buyers took advantage of lower prices, however, towards the end of 2023, affordability constraints have become more pressing, skewing demand towards the middle-to-lower end of the pricing spectrum," Owen said.


Commonwealth Bank chief economist Stephen Halmarick shared his projections for the year ahead with News.com’s Fergus Ellis. He said interest rate rises in 2023 had the desired effect of slowing down the economy, to a point where there was a high chance interest rates could finally start going the other way, with cash rate cuts instead of hikes.

“CBA is forecasting the annual rate of inflation back at three per cent at the end of 2024, well ahead of the RBA’s current forecast and closer to the Commonwealth government’s latest forecast,” he said.

“We also expect the RBA to begin a modest monetary policy easing cycle from September 2024 onwards,” he said.

Selling at a loss

Domain’s Elizabeth Redman expects some owners to sell at a loss in 2024. “Homeowners who bought in the last few years and have to resell fast are increasingly likely to cop a loss on their deal.

“Among home sellers who had owned their property for three years or less, the proportion of sales that made a loss edged up to 6.6 per cent in the September quarter, from 6.5 per cent in the June quarter, CoreLogic figures show. This compares with 3.6 per cent in the September quarter of last year.”

PRD Nationwide chief economist Dr Diaswati Mardiasmo said some loss-making sellers would be investors who find their investment no longer stacks up: “It’s no longer financially viable to them in terms of the outgoing cost is higher than the incoming rentals,” she said.

“Although rentals have gone up quite a bit and significantly in some places, so has the mortgage rates and the council rates and the insurance fees and the body corporate fees.”

ANZ senior economist Adelaide Timbrell said most homeowners can afford their mortgages, but there may be some selling to reduce mortgage stress.

“RBA analysis suggests that the vast majority of people can pay their mortgages on an owner-occupier property and all of their expenses without dipping into savings. Of those who have to dip into savings, RBA analysis shows 70 per cent have at least six months of a buffer.

The RBA acknowledges that 5 per cent of mortgage borrowers spend more than they earn but says it’s not worried because less than 2 per cent are at risk of defaulting on their mortgage payments. RBA research concluded that even a big jump in unemployment would leave mortgage defaults “in the low single digits”. 

The RBA's head of financial stability Andrea Brischetto said the bank's research had found that  most borrowers could afford their mortgage at current interest rates: "While just over 20 per cent of borrowers are estimated to spend more than 30 per cent of their income on mortgage payments, a much lower share — at around 5 per cent — is estimated to find their income insufficient to cover their mortgage payments and essential expenses," she said.

“But that doesn’t mean that no-one is selling a property due to higher mortgage rates, and it could be for reducing stress on their finances particularly if it’s a second property.”

A national effort

The federal government has determined that 377,000 more homes need to be built across Australia over the next five years. NSW treasurer Daniel Mookhey said this represents a big challenge: “But it is no doubt we do need to build more homes across New South Wales and Australia if we expect this generation and the next generation to be able to have a roof over their head and equally to be able to afford to live in a state like New South Wales as well. 

“It’s certainly ambitious, it’s certainly possible but it requires a lot of things to go right for us to pull it off and we’ve got a lot of work to do.”

ABC economist Alan Kohler agrees it’s a big challenge, saying that when he and his wife bought their first house it cost about 3.5 times his annual salary; now it costs about 7.5 times the average annual income to purchase a median priced house. 

“In other words, my children – and all young people today – are paying more than twice the multiple of their income for a house than their parents – and their grandparents – did, and it’s only vaguely possible because both partners work to pay it off,” he said.

A 2023 report from the Australian Housing and Urban Research Institute (AHURI) showed home ownership rates among younger people have been in decline for the past two decades: “Increased house prices and cost of living have worsened the challenge of home ownership, with households – particularly low-income ones – unable to keep pace with market changes through their saving and budgeting strategies,” the report stated.

The AHURI report also found that a household with a typical income needs to save at least 20 per cent of that income for almost seven years just to put together a deposit for a median priced home.

The National Cabinet has agreed to build 1.2 million homes over the next five years as part of a national housing accord, in fulfillment of Prime Minister Anthony Albanese’s election campaign focus on supply. To meet that 1.2 million goal, Australia will need to increase its pace of building by almost 40 per cent from where it currently stands.

Macrobusiness’ Leith Van Onselen says a look at the current housing construction situation shows the difficulty we will have in attempting to achieve this: “The latest dwelling approvals data from the Australian Bureau of Statistics (ABS) revealed that only 164,200 homes were approved for construction in the year to October, which is around 76,000 below the Albanese government’s target to build 1.2 million homes over five years, or 240,000 a year.

“The highest single year of dwelling completions was 223,000 in 2017. This occurred alongside low interest rates, lower materials prices, and relatively abundant labour availability, which is the polar opposite of current conditions.”

NSW housing rides the rails

The NSW government has made a series of announcements that in summary mean areas near Metro and heavy rail stations will become targets for greater housing density. A process of rezoning, supported by legislation to overcome locally-placed barriers, will be used to, as Transport Minister Paul Scully described it, “marry public transport and housing” to create more homes.

The first eight transport hubs targeted for rezoning by November next year are Bankstown, Bays West, Bella Vista, Crows Nest, Homebush, Hornsby, Kellyville and Macquarie Park. The government will determine the mix of housing types to be built in these areas with high rise developments located close to the identified stations.

Some other details about these rezonings have been announced, including that affordable housing will make up a specified percentage of homes and the government will provide funding for community infrastructure projects such as open spaces and schools where appropriate. 

Significant changes will be made in heritage suburbs with existing local protections overridden if deemed necessary to support the construction of new housing. New planning guidelines explain that “a merit-based assessment will continue to apply to developments in these locations and relevant heritage controls will apply to the extent they are not inconsistent with the new standards”.

James Lesh, a historian and heritage specialist, says there is ‘little to no evidence’ that heritage classifications are barriers to housing supply: “Heritage is an easy target for a range of broader issues that are going on related to housing and affordability and access,” he told the Herald’s Michael Kosiol. “Our heritage areas are actually the densest neighbourhoods in our cities. We have heaps of people living in those areas. It’s those heritage protections that are making those suburbs so liveable, and the places where both the YIMBYs and the NIMBYs really want to live.”

There have been several negative reactions from councils affected by the Minns government’s plans. North Sydney mayor Zoe Baker said “this seems to be planning in the way totalitarian regimes do it. It’s like Ceau?escu in Romania, that we’re going to scrub everything and just put up towers,” she told Guardian Australia.

Darcy Byrne, the mayor of the Inner West Council, said: “Everyone knows there’s more housing density coming around transport hubs and in White Bay but extending high-density zoning into all surrounding suburbs is ludicrous and just won’t work.

“Given the massive cost of purchasing a terrace in Rozelle and surrounding suburbs, high-density rezoning wouldn’t deliver much new housing at all. You’d have to find a Saudi sheik or a Russian oligarch to afford the astronomical cost of buying up blocks of homes for redevelopment,” Byrne said.

Parramatta Council’s chief executive, Gail Connolly, was angered by the NSW government’s intervention that overturned a local planning panel’s rejection of a proposed 1080 home development at North Rocks. “Whilst [the] council acknowledges the state government’s desire to address the housing crisis, it needs to be done in a way that respects due process and the public policy principle of finality,” she wrote in a letter to Planning Minister Scully.

“Otherwise, the time and expense associated with local government and applicants engaging with planning panels will amount to wasted resources and will diminish the credibility of the local environmental plan-making process.”

Another battle between the City of Parramatta and the NSW government is shaping up over a proposed 34 storey tower on Hassall Street that includes retail space, build-to-rent apartments and car parking. The NSW Department of Planning and Environment supports the development but the Council opposes it saying the project poses a serious flood risk. It’s certain that there will be many more such conflicts as the government pushes ahead with its housing goals.

Return of the investors

For a time, it looked like the high and rising prices in Australian real estate were dampening the interest of investors while encouraging them to put their properties on the market. 

BresicWhitney chief executive Thomas McGlynn warned recently that a large percentage of Sydney landlords were selling up: “We’re definitely still seeing a large increase in the number of investors looking to sell compared to a year ago, which has doubled in our books. I think there are a lot of investors who haven’t come to market yet, but many are thinking about selling and calling us about it.

“Generally, when you see a large number of inquiries, you’re going to see more investment properties come to market”.

But as 2024 gets underway, it looks like investors are back for a New Year’s shopping spree. As The Australian’s James Kirby sees it: “As investors sat on the sidelines through most of the year, successive monthly reports show prices and rents rising relentlessly. Sooner or later investors were going to move and in the last few months the pendulum swung. 

As the CBA economics team has put it: “Demand from investors has outstripped that of owner-occupiers during the current upswing. Emboldened too by an expanding consensus that interest rates have peaked, investors are hunting nationwide.”

Many of these investors are from overseas. Record migration and China’s post-pandemic reopening have triggered a surge of foreign investment in Australian property, with international agents reporting a more than 400 per cent increase in property-related inquiries.

Treasury data shows that overseas buyers are flooding back into the Sydney market with buyers from mainland China, Hong Kong, Taiwan and Vietnam leading the influx. It’s a sign of the times that median house prices attracting interest from Chinese buyers are more than 25 per cent higher than they were in 2019. 

The latest NAB residential property survey said real estate professionals estimated the share of total market sales to foreign buyers had increased for the fourth straight quarter, to a 5½-year high. The share of foreign buyers also increased in the established housing markets

Because the federal government believes there are too many empty properties across Australia at a time when there’s a serious shortage of available housing, it now plans to penalise foreign buyers who leave homes vacant by doubling their costs of fees for buying property, and by charging six times the current rate for foreign-owned homes left vacant.

However, federal treasurer Jim Chalmers said foreign investment was still welcome and especially if it increases housing supply: "There are too many properties empty around Australia, part of the challenge here is we do have these tough foreign investor rules but we want to make them tougher," he said.

Despite the recent changes to policies affecting foreign investors, Australian property continues to offer overseas investors the security of a stable government and a strong economy. Expectations of moderate inflation, reasonable long-term financial growth and good rental yields are factors that will offset the federal government’s rule changes for most foreign investors evaluating the potential of the Australian property market.

Sources:

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