State of the market property report for December 2023

Australia’s housing market posted a lacklustre performance in November, with the monthly increase in values slowing to its lowest level since the start of the current growth cycle.

The Reserve Bank of Australia (RBA) held off on further rate hikes this month, although leading analysts expect monetary policy to remain tight due to ongoing inflation concerns.

Australia’s housing market cools

While Australia’s national housing market continued to see gains in November, growth eased and home values in several major cities contracted.

CoreLogic’s national Home Value Index (HVI) increased 0.6 per cent in November, for the smallest monthly gain since the current growth cycle began in February of this year.

The housing market has entered a phase of multi-speed price adjustment, with growth levels varying around the country. Three capital cities posted home price declines in November, led by Darwin with a 0.3 per cent fall, followed by Melbourne -0.1 per cent, and Hobart -0.1 per cent.

While Sydney home prices rose in November, growth slowed sharply to just a 0.3 per cent increase.

In sharp contrast, housing value growth in Perth accelerated to 1.9 per cent, for its highest level since March 2021. Other cities that saw robust home price growth in November included Brisbane 1.3 per cent and Adelaide 1.2 per cent.

Despite easing overall growth, nationwide housing prices have more than regained the ground lost during the slump that ran from April 2022 to January 2023, which saw dwelling values drop 7.5 per cent.

The HVI has since recovered to a record high, after bouncing back 8.3 per cent over the past 10 months.
A number of other factors could create significant headwinds for the Australian housing market in months to come.

Home affairs minister Clare O’Neil has announced a visa crackdown that is estimated to reduce migration by around 185,000 people.

Housing demand from abroad could also further weaken as a result of higher fees for vacant homes owned by foreign investors.

In NSW, supply could be on track to rise after the NSW government introduced reforms that override council planning restrictions in certain low and medium-density areas.

The reforms will fast track the development of medium-density buildings - including townhouses, duplexes and apartments of up to six storeys, in certain suburbs where they are currently restricted.

Small-scale developers are especially well suited to the creation of in-fill developments and ‘missing middle’ homes, given their flexibility as more nimble and adaptable businesses.

Lisa Digby, head of operations, CrowdProperty, said this means smaller developers are well-positioned to capitalise on the smaller in-fill opportunities that large-scale developers overlook.

“In-fill or brownfield development will be critical to delivering a lot of well-located housing, especially in areas that aren’t suitable for high rise projects but more suited to medium-density dwellings,” Digby said.

“The high-volume players aren’t going to look at the smaller in-fill sites, because it’s not worth their while with the overheads and cost base they need to cover.”

RBA holds off on rate hikes

At its final policy announcement for the year on 5 December, RBA governor Michele Bullock said the monetary authority would refrain from implementing another hike to the cash rate target.

The move came after the RBA broke a four-month pause on rate hikes in November, raising the cash rate target 25 basis points to bring it to 4.35 per cent.

While the stay on hikes in December may give breathing space to asset markets, economic observers caution that it’s still no cause for optimism on monetary policy or the housing market.

Bullock herself said that containing inflation remains the priority of the RBA and that more hikes are a possibility.

“Whether further tightening of monetary possibility is required to ensure that inflation returns to target…will depend upon the data and the evolving assessment of risks.”

Several leading analysts say the November rate hike was enough to weaken the Australian housing market to the point where it enters another slump.

CoreLogic’s Tim Lawless points to the possibility of Sydney and Melbourne entering a downturn in December and early January in the wake of the November cash rate increase.

“Fragility in buyers’ demand has been exposed by the latest rate hike,” Lawless said, who warned of overall prices “generally weakening.”

Louis Christopher, SQM Research Managing Director, said in his latest Boom & Bust Report that property values could fall in five capital cities next year as a direct consequence of RBA hawkishness.

“The interest rate rises of 2022, 2023 and possibly 2024 will finally start to bite homeowners and would-be homebuyers alike,” Christopher wrote.

“Distressed selling activity is expected to jump, especially in NSW where we are already starting to see a new trend upwards in that data set.”

Other observers, such as Rob Flux, developer and educator at the Property Developer Network, are more optimistic about the property market. They point out that the RBA will want to avoid a market crash, and sooner or later needs to ease up on interest rates.

“I think the property market is poised to take off, and, it’s just waiting for an excuse to take off,” Flux said.

“The first sign of an interest rate drop will be the thing that jettisons us into doing that. The RBA is going to try very hard to hold on to interest rates for as long as humanly possible to get us through to that phase.”

Institutional funds playing a role in new home building

CrowdProperty Australia CEO David Ingram said institutional funds are beginning to take more interest in smaller-scale projects but lack the resources to fund these projects at scale.

“At CrowdProperty we have seen an increase in investor interest and in particular institutional money that is seeing opportunities driven by the housing shortage and increasing rents that are delivering attractive rental returns,” Ingram said.

“Institutions are looking to fund larger assets such as build to rent and student accommodation where there is strong demand from returning overseas students who are struggling to fund accommodation.

“CrowdProperty is increasingly offering institutional investors exposure to diverse range of smaller specialist developments such as specialist disability accommodation that are benefiting from the both the market and policy settings.”