Key takeaways
The Australian property market has seen its fair share of ups and downs over the past few years, and 2023 is shaping up to be no different.
As we head into this new year, there are a few key themes that are expected to dominate the market.
The Australian property market has seen its fair share of ups and downs over the past few years, and 2023 is shaping up to be no different.
As we head into this new year, there are a few key themes that are expected to dominate the market.
These themes will have an impact on the real estate market in a variety of ways, from where people want tolive, how they buy and sell property, what kinds of investments offer the best returns, and more.
Each year seems to have its own themes.
For 2021, record low-interest rates fuelled extreme buyer demand and an exceptional pace of home price growth.
In 2022 rising rates have quickly rebalanced the housing market from last year’s extreme growth and remain front and centre of the fall in prices.
Throughout the latter half of 2022, as interest rates have quickly risen, demand to buy property has slowed from the strong levels seen last year and into early this year.
As inflation rose and interest rates moved higher, consumer confidence has fallen, and expectations of continued price fall weighed.
Given that this new environment has shifted property market conditions, what could be our property market themes for 2023?
1. Buyers hold the upper hand
According to PropTrack's Senior Economist, Eleanor Creagh, one of the other big changes for the housing market this year was the amount of choice buyers have, with an increase in the number of properties available for sale in most parts of Australia.
She further said:
"Last year, sellers had the upper hand and overwhelmingly so, but the balance of power has shifted.
Although spring was quieter than usual with respect to new listings the increase in choice over 2022 has been significant in the capital cities.
Buyers in Sydney, Melbourne and Canberra have been enjoying more options than has been typical for the prior decade.
And while conditions remain tougher for buyers searching in Brisbane, Adelaide and Perth, where the number of properties listed for sale remains below pre-pandemic levels, choice has improved for these buyers over much of 2022.
Buyers in Hobart have seen a particularly sharp increase in choice, with the total stock of properties listed for sale up 77.5% compared to a year ago.
With market conditions cooling and more choice, buyers are regaining the upper hand in negotiations, properties are staying on the market for longer, with buyers having less pressure to move so quick.
In October 2021, when sellers held the upper hand, just 29% of sales Australia-wide were at prices below their original list price.
But as interest rates have quickly risen and selling conditions have slowed, that share has risen swiftly.
For buyers, the increasing willingness of vendors to discount after several months of price falls could make it easier to get into the market."
2. Strong rent growth to cushion downturn
While homebuyers have regained the upper from sellers, the same is not true in the rental market.
Finding a rental property at the moment is extremely tough for would-be tenants, with significant competition and little choice.
As a result, price pressures have been strong Australia-wide throughout the past year.
Ms Creagh shared her insights:
"Permanent and long-term net arrivals are a timely proxy for Australia’s net migration trends.
And arrivals are a strong leading indicator for long-term population growth.
Rental demand doesn’t look likely to ease any time soon with migration rebounding strongly and rental demand in the capital cities remaining strong pointing to continued rent growth in the capitals over 2023.
We know recent arrivals to Australia are most likely to be renters, and typically the inner and middle ring suburbs of Sydney and Melbourne, indeed overseas searches to rent on realestate.com.au have risen strongly this year.
Rental supply constraints have been exacerbated by reduced investor activity.
The good news for potential investors is rental yields are increasing, with strong rental price growth and slowing property price growth.
The return of immigration will add to rental demand for landlords, particularly in the inner cities."
Obviously, if rents continue to outpace housing values, yields will continue to recover enticing investors back into action.
And once interest rates stabilise as they are expected to next year, investor activity may begin to increase likely underpinning the apartment market, particularly with the value units offer relative to other property types.
Tight rental market conditions may also encourage others into home ownership and together with investor activity, strong rent growth has the potential to buffer price falls.
3. The opportunity for upgraders
With the fast pace of rate rises rebalancing housing market conditions across the country, and reducing buyers borrowing capacities and budgets, more affordable regions have held up better in 2022.
It’s often the case that the upper end of the market experiences larger price declines and this time is no different with prices are declining the fastest in the most expensive regions and property types which may be a benefit for those thinking of upsizing.
And in 2023, once interest rates stabilise and uncertainty reduces, some may take advantage of this.
4. Borrowing capacities are significantly lower
Now the cash rate is sitting at 3.10%, with a substantial 300 basis points of tightening pushed through to date, and maximum borrowing capacities have dropped by close to 30%.
Ms Creagh commented:
"The significant reduction in borrowing capacities implies further price falls.
It will take time for higher interest rates to fully affect prices, so they are likely to continue to fall as interest rates continue to rise.
In addition, the 300-basis point rise in rates now surpasses the 250bp serviceability buffer applied through to late last year.
As a significant portion of low fixed-rate loans expires next year, conditions will be further tested."
5. Interest rates find opposing forces?
Interest rate increases continue to be the primary driver of home price falls, but home prices and the distribution of price growth around the country are influenced by a range of other factors, including labour market conditions and wage growth, building activity, and population growth.
Ms Creagh shared her insights:
"The downward pressure from rate rises will be countered to a degree by positive demand effects that stem from tight rental markets and rental price pressures, rebounding foreign migration, stronger wages growth, and over the long run, housing supply pressures.
In addition, if interest rates peak in 2023 as expected, price falls are likely to ease, with values stabilising as uncertainty reduces."
