Australia’s Housing: From Boom to Stabilisation?

Australia’s housing market has been a rollercoaster of emotions for investors. As we move forward, a combination of economic factors and expert insights paints a promising picture for the future.

We’ve had a wild ride in recent years as prices slumped during the pandemic then quickly skyrocketed before losing ground again. Currently, as prices stabilise or show modest growth, some analysts foresee promising developments.i

A combination of positive indicators for housing could help to fuel further price rises.

With a widespread view that the Reserve Bank’s interest rate increases are beginning to work to ease spending, some believe we may see the first rate cuts as early as next March. Coupled with rising migration and a decline in new home constructions, we might witness a surge in residential property values. CBA Chief Economist Stephen Halmarick is forecasting a 7 per cent rise in house prices this year and another 5 per cent in 2024 claiming that, by this time next year, prices will return to “all-time record highs”.

Driving Factors Behind the Housing Price Surge

The sustained levels of high demand clashing with historically low levels of for-sale listings are also pushing prices up, according to the Property Investment Professionals of Australia (PIPA).ii

Meanwhile, several investors grapple with the challenges posed by escalating interest rates, with the conclusion of fixed-rate mortgages often playing a role. The number of short-term property resales made at a loss has jumped, according to property analysts CoreLogic, from 2.7 per cent a year ago to 9.7 per cent in the June quarter this year.iii The median loss was $30,000, for houses sold within two years, compared to a median profit of $75,000.

PIPA’s annual survey to gauge property investor sentiment found just over 12 per cent of investors sold at least one investment property in the past year.iv Less than a quarter of those houses sold went to other investors, continuing a trend that has been happening for several years.

Nearly 50% of sellers expressed concerns over potential hikes in government taxes, duties, and levies.

Where are rents headed?

Will rents continue to rise or stabilise? Experts’ views are mixed about the short-term outlook for the rental market.

The Rental Market: Current Trends and Predictions

The Reserve Bank says the continuing shortage of rental housing is likely to support ongoing increases in rents.v

The rents paid by new tenants provide a good indication of price movements in rental housing. Actual rents paid by new tenants increased by 14 per cent over the year to February 2023. Since the onset of the pandemic in 2020, rents paid by new tenants have increased by 24 per

The Reserve Bank says rents for apartments with new tenants have been more volatile than for houses and townhouses over the past couple of years.

Rents for apartments with new tenants fell sharply during the pandemic and remained below pre-pandemic levels until early 2022 but rose 24 per cent over the year to February 2023, whereas the overall index increased by 14 per cent. By contrast, rent for houses and townhouses with new tenants increased by around 10 per cent over the year to February 2023.

But CoreLogic predicts a slowing in rental price growth next year, saying rents rose for the 35th month in a row in July but monthly growth has eased over the past four months. It says the expected drop in interest rates next year combined with softer income growth and stretched rental affordability will contribute to a slowing in rents.

First homebuyers falling

The recent boom in property prices, the positive outlook and the many assistance programs available from federal and state governments have not been helping those looking to get into the market.

A recent study highlighted a significant decline in first homebuyers over the past three decades. vii Published by the Australian Housing and Urban Research Institute, the study says the drop in first homebuyers is down to delayed partnering, higher rates of educational attainment and associated debt, the precarious nature of employment and worsening housing affordability.

The study says various government policy decisions have had little effect on the numbers of first homebuyers.

Build-to-rent growth

Australia’s growing build-to-rent (BTR) market is getting a boost from governments eager to increase housing stock. Various state governments have introduced a raft of incentives for build-to-rent projects, mostly in the form of tax concessions.

BTR projects, common in Europe and North American, see landlords build a large-scale residential development intending to hold it for the long-term while renting the apartments for longer-than-usual terms, often as long as three years with rent increases locked in. Rents are often slightly higher than market averages in return for better communal amenities such as roof gardens and gyms.

Institutional investors, such as super funds, are also getting onboard with the projects, favouring the steady income stream.

Though dominated by major developers and international entities, Australia’s BTR market is also attracting smaller private investors. On the plus side, BTR offers regular income, often better returns and the chance to minimise expenses, not to mention the government tax concessions.

On the downside, there is the possibility the BTR concept might not take off in Australia and that vacancy rates may be higher as a result. There is also a downside to the promise of regular income – locked in rental increases may not keep pace with rapid market changes.

Rental Vacancy Rates*
Seasonally adjusted

* Data is monthly for Sydney and Melbourne and quarterly for all other serires

ii, iv
v, vi

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.