State of the market property report for August 2023

Australian house prices extended their recovery in July, and could receive further succour from the Reserve Bank of Australia’s (RBA) decision to extend its hiatus from rate hikes in August.

Property prices could soon come under pressure, however, as fixed-rate mortgages expire in the final quarter of 2023, creating potential buying opportunities into the new year.

Housing supply remains a major concern with national cabinet meeting this week to propose measures to build more ‘well-located’ housing which could be a long term boon for small-scale developers.

Home prices continue to rise in July

While home prices continued to rise in July, the pace slowed significantly compared to the growth rates posted in June.

Monthly growth in national home values was 0.7 percent in July, as compared to a 1.1 percent lift in June, according to figures released by CoreLogic.

Growth was stronger in Australia’s capital cities, which saw their combined dwelling market value rise 0.8 percent on-month, easing from 1.2 percent in June. Combined regional market value rose 0.2 percent in July compared to the preceding month.

“While the market is starting to recover, value growth is largely being led by capital city markets, reflecting milder housing demand across regional Australia as demographic patterns normalise,” said Eliza Owen, head of research, CoreLogic Australia.

Australian home values rose 2.9 percent in the three months to July, for their largest quarterly increase since January.

Housing supply remains a significant concern

The Housing Industry Association’s (HIA) chief economist, Tim Reardon, warns that even with a potential rate cut by the RBA, Australia’s detached home construction is headed for its lowest levels in over a decade. The HIA’s economic report reveals declining new home starts due to rising interest rates and land costs.

Reardon stressed that addressing the housing shortage requires three government actions: increasing land supply, reducing tax and regulatory burdens, and investing in public housing. He emphasized that recent projections of housing demand by state governments underestimate population growth. Despite anticipated improvements in multi-unit starts, detached home commencements are projected to decline to 95,370 in 2024, the lowest since 2012. However, multi-unit construction is expected to rebound, guided by a solid economy, population growth, and a halt in rate rises.

Highlighting the opportunity for building apartments, Mirvac, mentioned in the Australian Financial Review, is ‘encouraged by woeful apartment supply’, which is running about 50 per cent below where it was five years ago. Due to issues including surging construction costs and funding challenges, less than 15,000 apartments will be completed in 2025. Australian annual immigration is running at 400,000.

National cabinet proposal for housing

The national cabinet met this week in Brisbane to discuss housing issues. The cabinet has increased the national target to build 1.2 million new, ‘well-located’ homes within five years, surpassing the previous National Housing Accord goal. The Commonwealth has allocated $3 billion as performance-based funding called the ‘New Home Bonus’ to incentivise meeting set targets. This initiative, accompanied by the Housing Support Programme, a $500 million competitive fund, aims to activate housing supply in strategic areas by supporting essential services and planning capabilities.

The ‘National Planning Reform Blueprint’ outlines measures for boosting housing supply and affordability, such as updating planning policies increasing density, and streamlining approval processes.

CrowdProperty head of operations Lisa Digby said the national planning reform will offer greater opportunity for small-scale developers with the focus on medium density housing, changes in zoning, and more land releases very much on the government’s agenda.

“We need more housing and also diversity in housing that better meets people’s needs,” Digby said.

“The question is, how long will it take state and local governments to implement these reforms? The planning and update cycle for LEPs [local environmental plans] for example, usually takes years for some councils, so it will depend on whether they’re going to put pressure on fast tracking these reforms. The carrot will be the $3 billion New Homes Bonus they’re dangling for state governments to meet and go beyond their housing targets.”

The national cabinet’s decisions also extend to a better deal for renters whereby policies for reasonable eviction grounds, annual rent increase limitations, and phased minimum rental standards have been agreed to by the states and territories.

RBA maintains pause on rate hikes

The recovery in Australian house prices could receive a boost from the RBA’s decision to maintain its pause on rate hikes.

On 1 August, the RBA announced that it would keep the cash rate target unchanged at 4.10 percent, marking the second consecutive month it has held off on hikes. The benchmark rate has risen by four percentage points since May 2022.

RBA governor Philip Lowe said that while inflation in Australia was still too high at 6 percent, it is nonetheless on a declining trajectory, with forecasts for it to fall to around 3.25 percent by the end of 2024 and into the 2-3 percent target range by late 2025.

Rob Flux, developer and educator from the Property Network, believes the latest announcement should give hope to investors eager to see a dovish turn from the RBA.

“This has given us some early indicators that they’re probably going to start dropping interest rates in the early new year,” Flux said.

“Three out of the four big banks predict the first interest rate cut will come in March of next year, with four rate cuts set to follow in 2024.”

Housing market will still come under pressure

Despite hopes the RBA’s current tightening cycle is about to come to an end, the Australian housing market is set to come under greater pressure with more than 1 million fixed rate mortgages expected to expire come 2024.

“Between now and when rate cuts arrive, we’ve still got the mortgage cliff that everyone’s been predicting,” Flux said.

“As soon as that mortgage cliff hits, a lot more people are going to come under stress and we’re going to see a bunch of properties start to come onto the market.

“This in turn will soften the market, because at the moment the only thing propping it up is a lack of stock. This could cause just a small retraction or even a bit of a bloodbath.”

Flux expects this weakening of the market prior to the RBA’s resumption of rate cuts to present strong buying opportunities for developers and investors. This is especially the case given prices are likely to rise sharply once monetary policy returns to an accommodating setting.

“There’s going to be some good buying opportunities in the final quarter of this year and the first quarter of next year,” Flux said. “Then it could be off to the moon from the middle of 2024 onwards.”