A recent recovery in Australia housing prices could falter in the wake of the Reserve Bank of Australia’s (RBA) surprise decision to resume rate hikes in May.

Property developers and investors should nonetheless ready themselves for the opportunities that could come with a second-phase property boom in six to 12 months time.

Recovery of housing market continues

According to data from CoreLogic, property prices in Australia have risen for a second consecutive month following a sustained decline throughout most of 2022.

The median value of homes sold across Australia rose by 0.5% in April, after posting a 0.6% increase in March.

The back-to-back gains in nationwide housing prices arrived after CoreLogic’s national Home Value Index (HVI) posted a 9.1% drop during the period from May 2022 to February 2023.

Sydney was a key driver of nationwide growth in April, with a 1.3% increase in home prices in Australia’s most populous city. The median home price in Sydney now sits well above the $1 million threshold.

Australia’s other larger capitals also saw robust gains in home prices in April, with Melbourne, Brisbane and Perth all seeing increases of over 1%.

CoreLogic’s Research Director Tim Lawless said the data pointed to a recovery in the housing market that has already passed its inflection point.

RBA surprises market with May rate hike

The two-month recovery in Australian home prices could be undermined, however, by the RBA’s surprise decision to resume rate hiking in May.

On 2 May, the RBA unveiled a 25 basis point increase to the cash rate target, lifting it from 3.6% to 3.85%. The move arrives after a pause in rate hikes in April, and marks the 11th increase in the space of a year.

The decision came as a shock to much of the market, with the majority of economists at leading banks forecasting another pause on rates this month.

Higher interest rates will weigh heavily on property market investment by increasing the cost of borrowing, potentially putting an end to rising home prices.

Forecasts for dwelling investment may be overstated

The Treasury statement cautions that the current negative forecasts for dwelling investment may be overstated.

“A significant pipeline of projects currently underway is supporting dwelling investment, with the sector working through the tail end of recent strong demand, supply chain delays and disruption due to floods in 2022. As work is completed and the impact of earlier interest rate hikes and house price declines flow through the system, activity is expected to contract by 3.5 per cent in 2023-24.

“The downturn in activity is expected to extend into 2024-25, with a further 1.5 per cent decline anticipated, before recovering strongly over 2025 and onwards. The ongoing rebound in net overseas migration, strong rental yields, potentially lower interest rates and a reduction in building input costs are expected to drive the recovery, particularly in medium and high-density housing. Government initiatives to boost supply will also assist in supporting investment in new dwellings.

“There is some downside risk to the near-term outlook associated with the weak financial position of a number of builders, due to elevated construction and financing costs. However, as capacity constraints ease, these pressures are expected to moderate.”

Federal budget recognises housing importance with the cost of living challenges

CrowdProperty Australia CEO David Ingram said this year’s federal budget acknowledges that housing is a key aspect of the current cost-of-living challenges faced by Australian households.

“In the budget there were some more immediate housing support measures to provide a small cost relief by increasing rental assistance for around one million low-income earners,” Ingram said.

“The challenge for the government policy is that while it committed in the budget to a policy to increase supply, it still requires the Senate to pass the National Housing Accord and Housing Affordability Future Fund. The budget will increase the National Housing Finance and Investment Corporation’s (NHFIC) total liability cap from 1 July 2023, which will allow more low cost and long term loans to community housing providers for new social and community housing projects.”

The budget saw little in the way of incentives for small-scale developers to help ease supply challenges. The new budget tax incentives were reserved for larger build-to-rent projects that only apply to projects consisting of 50 or more dwellings made available for rent. The dwellings must be retained for at least 10 years before being able to be sold individually and tenants must be offered a lease term of at least three years for each dwelling.

The budget numbers confirmed the population boom. This is mainly being driven by skilled migrants who need somewhere to live, which in turn drives more competition for the limited supply of homes on the market. According to the budget, population growth is accelerating to 2.0% in 2022–23, then forecast to be 1.7% in 2023–24 (up from an estimated 1.4% for those years in last October’s budget).

This latest demand outlook is in line with RBA Governor Lowe’s recent observation that: “Population growth…will soon be around two per cent, which would be close to the peak reached during the resources boom. In contrast…it takes a long time for housing supply to respond fully to shifts in population growth – in the previous episode of strong population growth, it took around five years. The balance between demand and supply in the housing market will result in rents inflation being quite high for a while.” (RBA Governor Lowe, “Monetary Policy, Demand and Supply”, 5 April 2023).

[Opinion] Potential for a housing boom in 2024

Rob Flux, developer and educator from the Property Developer Network, expects home affordability to improve until the start of next year, given its critical importance as a policy issue.

“Housing affordability is very high on the agenda, so the RBA will hold their rates steady probably until Christmas, before they start to come off in the early new year,” Flux said.

Once monetary policy starts to ease, Australia could see a second housing boom on the back of improved affordability, in tandem with rising demand created by the resumption of immigration since the wind up of Covid-related restrictions.

“We have more immigration-driven population growth now than before Covid, and that’s starting to put huge demand on the housing market, which is reflected in a jump in rents,” Flux said.

“We also have a massive undersupply in potential stock, and that’s going to collide with the jump in demand.

“As interest rates start to come down early next year, that’s when I would project the start of a second-phase boom in the housing market.”

Flux advises that developers and investors make preparations in advance for this upcoming housing boom.

“It’s going to take 12 - 18 months to get approvals and construction underway, so we need to be getting into deals now, because by the time we get out of our deals, the boom may have started.”

Ingram said CrowdProperty was seeing the ‘rental squeeze’ driving up rents.

“This isn’t good for people who need homes, but it is positive for those planning build-to-rent projects or projects in progress. We have seen increased project valuations, and there is certainly demand for the finished product.”

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