It is a question on everyone's mind: what are the 2024 Australian property market predictions?
Before we share our five predictions, let’s take a look at how the Australian property market performed throughout 2023. Despite mortgage holders facing 13 rate hikes in the past 18 months, with five of them in 2023, the market has shown remarkable resilience.
Property Prices: Over the last 12 months, prices have risen by 8.1%. Perth saw the highest growth at 15.2%, while Hobart had the highest decline at -0.8%.
Sales volumes: In the 12 months leading up to November, there were 479,477 property sales nationwide, which is a 7.6% decrease from the sales volume recorded in November 2022.
Median Days on Market: It now takes slightly longer to sell properties across Australia, but the median selling time has increased year-on-year from 30 to 32 days.
Vendor Discounting: Vendors across the country have reduced their discounting rates from -4.4% to -3.6% over the past 12 months up to November 2023.
Total Listings: As of November 2023, new listings remained -17.7% below the historic five-year average and -1.3% compared to the same time last year.
Rental Rates: prices have increased by 8.3% over the last 12 months but the acceleration of growth is starting to slow.
Dwelling Approvals: Trending higher since a recent low in January 2023, but remain relatively low overall. For the past six months, monthly dwelling approvals have averaged 13,838 below the decade average of 17,277.
But how is this possible despite high interest rates and a cost-of-living crisis?
Listings are 17.7% below the five-year average, with strong buyer demand outweighing the available supply (as of November 2023).
According to the Cordell Construction Cost Index (CCCI), construction costs have risen by an additional 4.0% in the year ending September 2023. Although the rate of increase has significantly declined from 11.9% in 2022.
According to ABS data up to March 2023, Australia saw a record net migration of 454,000 driven by a larger increase in arrivals and fewer departures, equating to approximately 182,000 additional households.
Borrowers previously on fixed-rate mortgages, as well as those who have variable terms, have used various methods to tackle rising rates, such as utilising their savings, reducing their rate of saving, working longer hours or cutting down on discretionary expenses. The number of mortgage arrears has also remained below 1%.
Tight rental markets have driven up investor purchases as nationally advertised rents rose by 8.1% in the past 12 months.
Buyers felt more confident purchasing a property, with expectations that the cash rate may have peaked and no further increases imminent.
Here are our 2024 Australian Property Market Predictions
1. Lending will get easier in 2024
Cash Rate has reached (or is near) its peak – with conversations shifting to rate cuts in 2024
It is common for Australians to have differing opinions on whether the cash rate will increase, decrease, or remain steady. This is not surprising as leading economists are unable to agree on its future trajectory. According to recent predictions, interest rates are expected to start declining from September 2024.
Here are the forecasts from the big four banks:
The RBA has not changed their messaging and will raise interest rates if the economic data suggests inflation will not return to its target band of 2 to 3 per cent by December 2025.
Throughout history, when interest rates decline, property prices rise (even in the face of interest rate hikes).
Watch this space…..
Calls for the serviceability buffers to reduce
Some people are asking APRA to ease their serviceability buffers, which are currently set at 3%. What this means is that if you want to apply for a home loan with an interest rate of 6%, you will be assessed as if the interest rate is 9%.
However, it seems that there won't be any immediate changes to this, as APRA believes that the current level is effective. They have justified this by pointing out that loan performance has remained sound, with only a slight increase in arrears rates and non-performing loan rates. Less than 1% of borrowers are in mortgage arrears, despite the average mortgage repayment increasing by $1,287 per month since the start of the interest rate hike cycle.
Whilst APRA has not flagged any immediate changes, banks have implemented policies to enable them to make exceptions to the serviceability buffer on a case-by-case basis, including for borrowers who want to refinance, if the number of exceptions remains within the bank's risk appetite. Banks are in the business of lending money and if they can continue to do so whilst following responsible lending practices, we can expect to see banks continuing to offer these refinancing options throughout 2024. Therefore making access to credit a little easier.
2. Affordable Markets will continue to thrive in 2024
Affordability issues and lower borrowing power made it difficult for many prospective homeowners to purchase throughout 2023. This trend is expected to continue; however, the outlook could improve for buyers if there are interest rate cuts or an easing of the mortgage serviceability buffer. If we look at Core Logics 2023 Best of the Best Report, a majority of suburbs with the highest price growth were located within the affordable pockets.
Given that interest rates are expected to remain high throughout 2024, affordable markets will likely continue to outperform expensive markets.
Note: figures above are as of November 2023
3. Population growth will continue to drive demand
Australia's population is expected to reach 30.9 million in the next 10 years, with an increase of 4.3 million, including 1.6 million from net overseas migration. Australia has a well-known problem of not having enough houses to cater for the current population.
The primary factor behind the increase in property prices is the demand for housing outstripping its supply. If we don't take appropriate steps to address the housing shortage, the demand for housing will likely continue to rise, putting pressure on property prices to rise even further. To put this in perspective, Australia is predicted to experience above-average population growth. Historical trends show that with a growing population, there is a natural increase in property prices due to higher demand.
4. Housing shortage will continue
As of the end of November, the total number of advertised properties was around 168,000, which is 14.8% lower than the previous five-year average for the same period. This indicates a significant decline in the number of properties available for sale.
While on the construction side, dwelling approvals remain relatively low overall and for the past six months, have averaged 13,838, below the decade average of 17,277.
The government recognised the need for more housing, and in August, the National Cabinet agreed to construct 1.2 million homes over the next five years. This means that we need to build 240,000 homes each year. However, only 170,000 homes were completed in the year up to March 2023. This represents a shortfall of nearly 40% compared to the target. It’s also worth noting that Australia has not built 250,000 homes within a single year before, and building homes is taking even longer than it has in previous years.
Given the current estimated annual growth of close to 600,000+ people per year (both natural increase and net overseas migration), the new residents will exhaust the 1.2 million homes based on an average household size (AHS) of 2.49. It’s also taking a lot longer to build homes.
But why is this the case? Well, there are two major factors.
Construction costs have surged since the pandemic, driven largely by the increases in the cost of materials. But costs are starting to stabilise as construction costs only increased by 1% between March and June 2023.
The current pace of approvals for new homes is nowhere near what it was in the late 2010s, and not enough to hit 1.2 million over five years.
The challenge of building an additional 1.2 million homes over the next five years will remain difficult until we can find ways to construct them faster and at a lower cost. This will lead to a continued shortage of housing across Australia, which will continue to worsen as the population grows.
5. Rental Market growth will slow but continue to grow
The national rental growth rate was 8.1% over the past 12 months. However, it seems like the growth has peaked and is trending downward but despite the downward trend, rental markets are expected to climb, albeit at a slower rate.
The slower growth rate in Australia can be attributed to the fact that the Reserve Bank of Australia has either already reached its peak or is very close to it in terms of its current interest rate hiking cycle. Furthermore, inflation is beginning to stabilise, which is also a contributing factor.
This can have a direct impact on rent prices for several reasons. Rent prices are taken into consideration when measuring inflation. If rent prices increase, inflation may also increase, which prompts the RBA to raise interest rates. However, when interest rates go up, the cost of holding onto investment properties also increases, and landlords tend to pass these additional costs onto their tenants. This, in turn, makes investment properties less appealing to potential investors, which can slow down the delivery of rental properties coming onto the market. If the demand from renters is high, this can push rent prices even higher.
Double edged sword right?
It’s also important to point out that rental prices were increasing before the RBA began hiking interest rates. This was because the demand for rental properties exceeded the supply. This is a flow-on effect from the housing shortage discussion above. According to SQM Research, residential vacancy rates have shown no improvement throughout the year and have continued to decline since 2020.
The increase in rental prices is due to the lower vacancy rate caused by an imbalance between the supply and demand of rental properties. A healthy rental market typically has a vacancy rate of 2-3%.
History shows us that as vacancy rates decline, home price growth trends upwards.
To summarise, there is currently a shortage of rental properties available for rent. Additionally, high interest rates and stubborn inflation are causing concerns, though the latter seems to be on the decline. Until these three issues are addressed, the supply and demand fundamentals are unlikely to be corrected anytime soon.
So where will property prices land in 2024?
It appears that many of the key factors that led to the rise in property prices in 2023 will persist in 2024. The primary obstacle for potential homebuyers is their ability to obtain credit, while the supply of available housing remains limited. It is anticipated that access to credit will improve, but the supply of homes will remain constrained. Given these circumstances, property prices are expected to continue increasing in 2024.
If you would like to know more about how we can help you build a property portfolio give us a call on 0423 344 286 or email us at hello@mindsetproperty.com.au, or simply connect with our Director Peter Theodorou.
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Note: This is general advice and does not take into consideration your objectives, situations or needs. Please consider if this advice is suitable for you and your circumstances and speak to a professional before making any financial decisions.
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