The Australian property market could be set for further hardship ahead, after the Reserve Bank of Australia (RBA) committed to hawkish monetary policy in a move that some observers fear could tip the economy into recession.

It’s CrowdProperty’s view that the lull in the property market is likely to be temporary, given its strong underlying fundamentals, while weak home prices could also create opportunities for savvy, far-sighted investors and developers.

Australian home prices continue to fall

Data from CoreLogic indicates that Australian home prices continued to decline in January, albeit at a steadily easing pace.

Its national Home Value Index dipped by 1.0% in month-on-month terms in January, for the smallest fall since June last year, and a modest improvement compared to the 1.1% decline seen in February.

CoreLogic Research Director Tim Lawless said that the pace of decline in Australian home prices was shedding momentum.

“The quarterly trend in housing values is clearly pointing to a reduction in the pace of decline across most regions,” he said.

“However, at -1.0% over the month and -3.2% over the rolling quarter, national housing values are still falling quite rapidly compared to previous downturns.”

Reserve Bank of Australia commits to more rate hikes

The momentum of declining Australian home values could rise again, however, following the RBA’s decision to maintain hawkish monetary policy in the first quarter of 2023.

On 7 February, RBA Governor Philip Lowe announced that the monetary authority would increase the cash rate target by 25 basis points to 3.35%, after CPI inflation over the year to December quarter hit its highest level since 1990.

Lowe also committed to further interest rate hikes in future, disappointing hopes for a suspension of hawkish policy by the start of 2023.

“The Board expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary,” Lowe said.

This hawkishness has contributed to further pessimism over the likely trajectory of Australian housing prices in 2023.

Daniel He, CrowdProperty Australia property director and veteran developer, said It’s been an eventful couple of months, with some concerning news about rising unemployment rates.

“Some market observers are taking this as a sign that the tide may be turning, and that the Reserve Bank of Australia’s (RBA) ongoing interest rate hikes could be drawing to a close,” Mr. He said.

“However, it’s worth noting that in the February update,, Philip Lowe made some strong statements about inflation, warning that it was still ‘way too high’ and ‘that failing to get it under control could lead to even more pain down the road’.

“It’s a complex situation. If the predictions from late last year were accurate and inflation is indeed peaking, then the current market fluctuations could be seen as expected.”

Rob Flux, developer and educator from the Property Developer Network, anticipates at least one and potentially even two more rate hikes.

“Next month there’s probably going to be another hike, and it’s plausible to see another one in the month afterwards,” Flux said.

“They’re really trying to slow us down — they don’t think they’ve slowed us down anywhere near enough. This means there’s going to be a negative impact on housing prices across the board.”

PropTrack expects property prices to decline by a further 7% to 10% by the end of this year, if the cash rate increases by just 50 basis points in 2023 from its December 2022 level of 3.1%. The latest rate hike from the RBA already brings the cash rate halfway to that level.

Opportunities abound, market fundamentals still sound

The challenges for the Australian property market caused by tighter monetary policy are likely to be only short-term in nature, given the strong underlying fundamentals of limited supply and rising demand due to return migration in the wake of the Covid pandemic.

Despite the uncertainties, Daniel He said there are still opportunities to be found.

“Buyer price expectations are starting to weaken, which could create good acquisitions in this cycle of the market,” Mr. He said.

Rob Flux agrees and sees buying opportunities before the market eventually returns to sound health.

“In the next several months there are going to be great buying opportunities,” Flux said. “The media will hype things, which will make a whole bunch of people really nervous, while the cash flow impact of interest rate hikes will cause prices to come down really hard.”

“For anyone, particularly in development, buying at these deflated prices will set them up well for when the economy returns to full fundamentals in 12 to 18 months.”

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Contributors
Rob Flux is the owner and founder of Property Developer Network, the largest national network of novice developers and renovators in Australia with a combined community of over 15,000 people.