We would like to provide you with an update on recent property market developments that may interest you.
Property Market update as of December 5 2023
Our Housing Market
Australia's housing market is exhibiting remarkable resilience, continuing its upward trajectory despite a series of aggressive interest rate hikes by the Reserve Bank of Australia. Over the past 18 months, official rates have risen by 4.25%, yet property prices have been climbing since early 2023, challenging many earlier forecasts.
As the year draws to a close, the inflow of new listings is tapering off, coinciding with a period of heightened buyer activity as many aim to finalise transactions before the holiday season. This scenario suggests that the most recent interest rate increase may not significantly impede market momentum.
Contrary to earlier pessimistic predictions, the majority of capital city markets are now expected to see double-digit capital growth this year. However, there are still some cautious voices predicting a potential downturn in 2024. While the growth rate might be more tempered in 2024, substantial price increases are still anticipated in five major capital cities, though cities like Hobart, Canberra, and Darwin might experience slight declines.
The sustained growth in property prices is primarily attributed to the continuing mismatch between supply and demand. Looking ahead, the market is expected to become more segmented, with a distinct preference for high-quality properties.
In terms of auction activity, recent weeks have been among the busiest of the year, with 2,972 homes auctioned across the capitals, slightly down from 2,990 the previous period. This activity level represents a 23.9% increase compared to the same period last year. Despite the high volume of vendors, buyer caution is evident, as indicated by the latest preliminary capital city clearance rate of 65.9%, the lowest since mid-March.
CoreLogic's report sheds further light on the property cycle, highlighting diverse trends across major cities:
Sydney's property prices have increased marginally over the last month, showing an 11.4% rise year to date, and are 10.1% higher compared to 12 months ago.
Melbourne has experienced a slight decrease in property prices over the last month, but overall, prices are up 4.0% year to date and 2.9% higher than last year.
Brisbane shows a more robust growth, with a a 1.2% rise over the last month, culminating in an 11.5% increase year to date, and 10.3% higher than the previous year.
Overall, Australian capital dwelling prices have risen by 0.5% over the past month, now standing 8.4% higher than a year ago.
This data suggests that the Australian property market is at the early stages of a new cycle, driven by an undersupply of quality properties against a backdrop of increasing demand.
The Year Ahead
Nicola Powell, serving as the chief of research and economics at inDomain, acknowledges that the property market in 2023 unfolded in ways that caught her off guard. At the onset of the year, the consensus among experts was skeptical about the possibility of property prices reaching new peaks, particularly in the context of the swiftest cycle of interest rate tightening in recent memory. However, the reality defied these expectations due to a confluence of two critical factors: a historic surge in immigration and a significant slowdown in new home construction. This combination intensified a housing supply shortage that had been developing over several years.
In light of these developments, Powell contemplates how 2024 might deliver its own set of surprises in the housing market. Powell emphasises the need to consider the enduring impacts of the recent population growth. Domain, points out that while the peak of net overseas migration might have passed, the influx of over half a million migrants in a single year is bound to have long-term repercussions.
These migrants, having initially settled into the exceedingly tight rental market, might soon transition into potential homebuyers. Additionally, the incoming wave of migrants in the following year is likely to face substantial challenges in securing rental accommodation. This scenario, coupled with the apparent stagnation in housing supply, sets the stage for an intensified competition among buyers vying for a limited pool of available houses.
Recent data, including CoreLogic's daily house price indices, indicate a tempering of house price growth. Despite this, Domain's projections suggest a continued rise in property values, predicting a growth of 6 to 8 percent for houses in Australian capital cities and a 2 to 3 percent increase in unit prices next year. These forecasts are underpinned by four major trends identified by Powell, all of which are expected to exert upward pressure on house prices.
One significant trend is what Powell describes as the "flight to affordability," where buyers are exploring alternative financing options to access more affordable market segments. This includes strategies like early inheritances from Baby Boomers or leveraging government home buyer schemes, such as the federal government's Help to Buy initiative. Powell notes that these measures, while intended to facilitate home ownership, may inadvertently intensify the strain on housing supply by increasing the number of buyers without a corresponding increase in available properties.
Another trend to watch in 2024 is a potential turning point in the rental market. Renters, grappling with escalating rents, are increasingly looking to buy homes. This shift could involve utilising first-time homebuyer incentives, entering house-sharing arrangements, or targeting more affordable locales or opting for units instead of houses. These transitions, logical in the face of rising rental costs, are likely to lead to a larger pool of buyers competing for a limited number of properties, thereby maintaining upward pressure on prices.
The third trend Powell is monitoring closely relates to interest rates. She posits that any reduction in interest rates could stimulate demand, as would adjustments to the mortgage serviceability buffer set by the prudential regulator. However, such increased demand, in the absence of a corresponding rise in supply, is unlikely to alleviate affordability concerns.
Finally, Powell highlights the urgent need for an improvement in housing supply. She finds encouragement in the growing political focus on this issue and the implementation of policy changes, including the federal government's commitment to building 1.2 million houses over the next decade and revisions to planning laws in various states. With a federal election looming in 2025, the continued challenges in the housing market are likely to amplify political pressure for decisive action.
Melbourne & Sydney
Melbourne's property market is approaching a significant milestone, potentially marking its first monthly decline in home values since a low point in January. Concurrently, Sydney's market is showing signs of deceleration, with property listings outpacing demand. Eliza Owen, CoreLogic's Head of Research, suggests that Melbourne might report negative growth by the end of the month, attributing this to a surplus in housing stock relative to demand. In Sydney, although the market is losing momentum, it's unlikely to experience negative growth, with home values still inching upwards, albeit at a reduced rate.
This cooling trend in Melbourne and Sydney contrasts with the robust growth in other cities. Perth, for example, saw home values rise by 1.7% over a similar period, with Brisbane and Adelaide each recording a 1.2% increase. CoreLogic’s daily home value index reveals a more nuanced picture: Sydney's home values declined for three consecutive days, while Melbourne experienced a drop on three out of seven days.
A shift towards a buyer's market is emerging in Sydney and Melbourne, driven by increased buyer leverage and limited borrowing capacity in a high-interest-rate environment. The influx of new listings in these cities over the past five months has outstripped sales activities, leading to a stock level that aligns with the five-year average in Sydney and exceeds it by 7.6% in Melbourne.
Recent data underscores this trend. Over three months leading to October, Sydney saw 23,339 new listings but only 21,217 sales. In Melbourne, 25,712 new properties were listed, with 20,250 sold. Independent economist Stephen Koukoulas notes that this increase in listings, coupled with a slowdown in demand, is a cause for concern. He suggests that the easing of the stock shortage and the strain of repaying large mortgages are contributing factors.
Koukoulas also points out that the latest interest rate rise has a more significant impact on the housing market than previous increases, potentially signaling a more profound shift. He anticipates a 3 to 5 percent drop in house prices in Sydney and Melbourne, though he doesn't expect a catastrophic crash across all capital cities.
Real estate agents are observing these market changes firsthand. Thomas McGlynn, CEO of BresicWhitney, reports a noticeable pullback from buyers in Sydney. He notes that buyers are approaching negotiations with less confidence, often opting for post-auction negotiations rather than aggressive bidding. This change in buyer behavior is a clear indicator of declining confidence.
Certain suburbs in both Sydney and Melbourne are increasingly becoming buyers’ markets. In Sydney, areas like Camden, Bundeena, Gordon, Longueville, and Hornsby have seen prices drop by more than 2% in the past three months. Similarly, in Melbourne, suburbs such as Carlton North, Fitzroy North, Richmond, and Alphington have experienced significant price drops, making them more attractive to buyers seeking leverage in negotiations. This shift in the market dynamics suggests a recalibration of power between buyers and sellers, indicative of a broader trend in the property landscape.
Our Rental Market
The rental market in Australia's capital cities is undergoing significant changes, with asking rents for houses showing double-digit annual increases, and even more substantial rises for units. In Sydney, Melbourne, and Brisbane, new asking rents for units have surged by over 20%.
This trend is occurring against the backdrop of unprecedented population growth. According to the latest National Accounts, Australia's population has increased by approximately 620,000 people in the past financial year, marking the highest number in the country's history. This figure exceeds the projections made in the May federal budget by a hundred thousand.
The substantial 2.8% growth in the population aged 15 and above is exerting considerable pressure on the rental markets. Contributing to this strain is the notable increase in the number of overseas students and individuals on graduate visas, which has risen by just over three hundred thousand in the last financial year.
Rents, particularly in inner-city areas popular with international students, have been bouncing back after a slump during the pandemic when international borders were closed. These areas are now witnessing a rebound in rental demand and prices.
Despite the expectation that the pace of rental growth may decelerate, the current low vacancy rates indicate that rents are likely to continue rising. This is further compounded by the limited new supply of rental properties expected to enter the market in the medium-term future. The combination of high population growth, increased demand from international students and graduates, and limited new property supply suggests a sustained upward pressure on rents in the foreseeable future.
Commercial Update
The office property sector is facing declining sentiment among lenders, as highlighted in CBRE's latest sentiment survey. Over the past 12 months, lender concerns regarding falling office values have intensified, exacerbated by a dearth of transactions that could provide a clear valuation of these assets. This trend has become more pronounced during the second half of 2023.
The survey, which included responses from 40 commercial real estate lenders, indicates a further decline in lender sentiment towards office properties, to the point where they are now viewed less favorably than retail assets. This shift is significant, considering the traditionally robust interest in office investments.
Sameer Chopra, head of research for CBRE Asia-Pacific, notes that the lower sentiment towards office properties is compounded by the lack of sales evidence in the market. This lack of data on yield softening delays any reassurance lenders might seek about the value impact in this sector. As a result, lenders maintain a conservative stance towards office investments.
The survey reveals that only 10% of respondents still consider office properties a preferred asset class for new investment, a sharp decrease from earlier in the year. In stark contrast, almost 80% of lenders favor industrial assets for new investments, even though this too reflects a 5 percentage point decline in sentiment from the first half of 2023. This shift is attributed to growing concerns about the cost of debt.
Lenders also continue to show strong interest in build-to-rent (BTR) properties across Australia, ranking it second behind industrial assets. This preference is followed by build-to-sell residential and alternative real estate investments. Notably, appetite for alternative assets, such as data centers, childcare centers, and renewable energy facilities, has seen the most significant increase over the past six months, with nearly 20% of lenders favoring these as new investments.
CBRE predicts that investment in alternative real estate assets, driven by Australia's renewable energy targets, could exceed $1.2 trillion by 2030, a substantial increase from the current $21.2 billion. The overall lending market sentiment for commercial property is mixed, with half of the lenders indicating a flat appetite for new loans in the next three months. About 37% of lenders are looking to grow their portfolios, while 10% plan to decrease them.
Given the disparity in sentiment between industrial and office properties, office landlords now face more stringent requirements to secure new development finance. Most lenders are only willing to provide loans for new office developments with pre-lease commitments for at least 60% of the space. In contrast, industrial assets typically do not require a pre-lease commitment for lending on new developments.
As a result, many office redevelopment projects may struggle to secure loan capital, leading to delays or indefinite postponements, particularly for projects not backed by well-capitalised landlords. This scenario underscores the evolving dynamics in commercial real estate lending, influenced by changing market sentiments and economic conditions.
Advice Warnings & Disclaimers.
This information is intended to provide general information only and has been prepared without considering any particular person’s objectives, financial situation or needs. Any general advice contained within or given during this presentation (whether orally or in writing) does not consider your objectives, financial situation or needs. Nothing in this presentation is intended to be investment, financial advice or a recommendation to invest in a financial product. Before acting on such information, you should consider the appropriateness of the information having regard to your personal objectives, financial situation or needs. To the maximum extent permitted by law, we (Forward Path Advisory Pty Ltd), Joel Cleary & Rathakrishna Jeyabalasingam (Rads Je) disclaim all liability and responsibility for any direct or indirect loss or damage which may be suffered as a result of relying on anything in this podcast, including any forward-looking statements. Past performance is not an indication of future performance. In particular, you should obtain professional advice before acting on the information contained in this presentation.
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