State of the market property report for March 2024

The Australian property market continues to improve, with nationwide gains in home prices accelerating in February.

The Reserve Bank of Australia (RBA) held off on rate hikes again in March, giving further succour to the market. Some analysts now expect cuts to interest rates as early as the second quarter, creating strong opportunities for developers. However, sticky US inflation, stimulus measures announced in the May Budget, expected tax cuts commencing in July, and rising housing costs, all potentially contribute to inflation , which has economists revising their position and suggests the RBA will likely hold off until they have a clearer view in the second half of the year.

Home price growth picks up speed

Australian housing prices posted a solid performance in February, with all of the capital cities and regions, except Hobart, seeing capital growth for the month.

CoreLogic’s national Home Value Index (HVI) saw a 0.6 percent rise in February, an acceleration of 20 basis points from the 0.4 percent increase in January. February’s increase also marks the largest monthly gain since October last year.

Perth led price gains, with an increase in housing value of 1.8 percent over the month. Adelaide and Brisbane also saw impressive growth, rising 1.1 percent and 0.9 percent respectively.

Tim Lawless, CoreLogic research director said demographic shifts were giving a boost to these parts of the national housing market where housing prices have long lagged behind the urban hubs of the eastern seaboard.

“These regions are generally benefiting from a combination of comparatively lower housing prices and positive demographic factors that continue to support housing demand,” he said.

By contrast, housing price growth stood at just 0.5 percent in Sydney and 0.1 percent in Melbourne for February. Hobart was the only city or region to see negative price growth, with a change of -0.3 percent.

Lawless said Australian home prices had held up well amidst heavy inflation and the RBA hawkish cycle of rate hikes. The RBA brought the cash rate target to 4.35 percent in November last year, its highest level in more than a decade.

According to Lawless, the mismatch between supply and demand continues to be the chief driver of shifts in Australian home values, overriding other headwind factors.

“Housing values have been more than resilient in the face of high interest rates and cost of living pressures,” Lawless said.

“The ongoing rise in housing values reflects a persistent imbalance between supply and demand which varies in magnitude across our cities and regions.”

Housing forecasts going backwards

As reported in the AFR this week, the housing forecast indicates a significant decline in new home construction, with only 79,000 new homes expected to be completed in 2026 across Australian capital cities, marking a 26 percent drop from the previous year. This sharp decrease is attributed to planning bottlenecks, labor shortages, and escalating material costs.

Despite government initiatives and incentives to boost housing supply, including a $3 billion new homes bonus, $500 million housing support program, and increased density allowances, achieving the government’s target of building 1.2m homes by 2029 remains uncertain. There remains a critical need for planning reform, a larger skilled workforce, and reduced barriers to institutional investment to address housing shortages effectively.

CrowdProperty head of operations Lisa Digby said medium density housing is still the fastest way to get more stock on the market.

“Larger scale development such as greenfield projects (house and land packages) and apartments take years for completion because of the construction and lead time required,” Digby said.

“This is where small-scale infill projects play a role in increasing housing stock. Time scales are generally quicker for getting smaller projects shovel-ready and construction completed, and with further planning policy changes announced in some states to increase medium density, this can unlock a lot of potential for more infill projects to commence and help us solve the ‘missing middle’ in Australia’s housing crisis.”

No consensus on rates

At its meeting on 19 March, the RBA announced it would once again hold off on further hikes to the cash rate target.

The decision was in line with market expectations, with few observers expecting any additional hikes from this meeting, and all of Australia’s big four banks anticipating cuts to arrive by the second half of 2024.

Property analyst John Lindeman of Lindeman Reports said the conditions are already ripe for the RBA to start reducing the benchmark rate.

“All the indicators are pointing to the RBA needing to reduce interest rates sooner rather than later,” Lindeman said.

“The economy flatlined in the December quarter, unemployment is rising, and the rate of inflation is falling.

“These three factors should all prompt the RBA to take action.”

For this reason, Lindeman expects a rate cut from the RBA to arrive as early as the second quarter of 2024.

However, HSBC chief economist Paul Bloxham highlighted the significance of the housing market in shaping interest rate trajectories, suggesting the RBA would be hesitant to further stimulate an already overheated housing market. As property prices soar to record highs nationwide, Bloxham contends that the acceleration of housing prices may deter the RBA from implementing rate cuts anytime soon, anticipating the central bank to maintain its stance until at least 2025.

Buying opportunities could abound

The property market could offer strong opportunities to investors once the RBA starts to cut rates, particularly given Australian banks are well-positioned to step up lending.

Lindeman points out that in addition to a decline in the cost of borrowing, the property market could benefit from the ample cash sitting on the balance sheets of lenders.

“It’s not just the cost of finance that matters, it’s also availability,” Lindeman said.

“The banks have been raking in record profits, so there’s no shortage of funds for them to lend to property buyers.”

Lindeman also highlighted the mismatch between supply and demand in the housing market creating strong opportunities for investors.

“There’s still a huge shortage in housing as well as rising demand, so we can expect property prices to rise significantly as soon as interest rates fall,” he said.

“This could be a unique window of opportunity for developers and investors to start buying.”