Following a tumultuous year for the property market in 2022, Australian homeowners, investors and developers are all hoping for positive change in 2023. Leading analysts expect the Australian housing market to continue to stall this year, however, although strong fundamentals could pave the way for improvement by the end of 2023.

Australia’s housing boom comes to an end in 2022

Following a boom spurred by Covid stimulus policies in 2020 and 2021, Australia’s housing market posted an unprecedented decline last year in response to the adoption of hawkish monetary policy by the Reserve Bank of Australia (RBA).

CoreLogic’s Daily Home Value Index logged a record fall of 8.40% on 7 January 2023, after breaching a peak in May 2022.

This figure breaks the prior record of an 8.38% decline in Australian home values during the period from October 2017 to June 2019.

The RBA’s battle against breakneck inflation is the chief culprit behind the ailing health of the Australian property market. It implemented eight consecutive hikes to the benchmark interest rate in 2022, leading to a rise in borrowing costs that undermined asset prices across the board.

“The main force behind record home value falls is the recent cycle of rate hikes that have risen at the fastest pace on record,” said Eliza Owen, CoreLogic’s Head of Residential Research Australia.

“A 300-basis point increase in the underlying cash rate over just eight months has resulted in a rapid reduction in borrowing capacity, lowering the amount buyers can offer for homes. In addition to constrained borrowing capacity, higher interest costs may be dissuading potential buyers altogether.”

RBA to stay hawkish in 2023

Given the profound economic influence of monetary policy, the decisions of the RBA will play a critical role in determining the state of the Australian property market in 2023. The untamed state of inflation in Australia means that the monetary authority is unlikely to ease up on its hawkishness any time soon.

The consumer price index published by the Australian Bureau of Statistics (ABS) rose by 7.8% over the twelve months to the December 2022 quarter, for the highest annual increase since 1990.
This three-decade record arrives despite the RBA’s implementation of eight consecutive rate hikes last year for the purpose of containing inflation.

Economists expect inflation to further increase, and the RBA to continue to keep interest rates high, putting further pressure on housing prices this year.

David Ingram, CEO and co-founder of property development marketplace lender CrowdProperty, said the market was perhaps already factoring in another interest rate rise or two with the pace of housing price declines slowing up in capital cities.

“More aggressive rate hikes leading to a further slowdown in the economy could contribute to increased defaults and distressed selling,” Ingram said.

“However, while the costs of living increases are being felt in day-to-day hip pocket items, the cost of building new homes slowed, only rising by 1.7% in the December quarter, driven by labour and material costs with signs that material cost pressures are easing, according to the ABS.”

Daniel He, property director at CrowdProperty and 17-year development veteran, said small-scale developers need to focus on acquiring sites at the best possible price in the counter-cyclical market.

“With the forecast of more rate rises, the cost of borrowing could increase, so it’s critical now more than ever to ensure finance is secured with speed and certainty to reduce the time spent on finding finance and maximise the time spent on acquisition and construction for the most profitable deals,” Mr. He said.

“However, we can look at the potential for material costs to ease as an advantage that can offset any increases in borrowing and provide potential upside in our deals.”

Strong fundamentals mean rebound is inevitable

Despite the adverse near-term impact of hawkish monetary policy, the underlying fundamentals of the Australian property market mean that a rebound is sure to arrive eventually, given that demand is on track to outstrip supply.

Rob Flux, developer and educator from the Property Developer Network, said the fundamentals of supply and demand mean the small-scale development sector is in a strong position in the long term.

“We’ve got a massive undersupply of stock that was consumed largely through the building boom, and we’ve got population growth starting to gain momentum because the borders have opened up,” Flux said.

“Towards the middle or later half of the year, that mismatch of supply and demand is going to start to take hold.”

For this reason, the Australian property market could be on track to see a recovery by early 2024, after the end of the seasonal lull during the Christmas and New Year vacation.

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