Property prices have remained remarkably resilient in one of the fastest rate-hiking cycles in history. In contrast to predictions by bank economists and other property forecasters that property prices would continue to decline in 2023, the exact opposite has been unfolding. Notably, NAB revised its national property forecast for 2023 from -10% last year to +4.7% last month. It is perplexing how these same "experts" are frequently quoted on property prices despite consistently missing the mark by such a large margin.

Has the market bottomed out?

Nevertheless, there is now a widespread consensus that the market bottomed out in January/February. The gains observed thus far this year can be attributed primarily to two main drivers: rapid migration levels and a scarcity of housing stock, which is approximately 25% lower than the five-year average.

This situation mirrors previous downturns, whereby hesitant vendors hold back from selling during a soft market, leading to reduced stock availability. Consequently, buyers face limited options and increased competition for a smaller pool of properties on the market. Recent data confirm this trend, showing prices increased over the last quarter by 4.5% in Sydney, 2% in Melbourne, and 4.2% in Brisbane.

However, it's worth noting that the pace of growth appears to be slowing in July as more stock enters the market. While new listings are bucking the typical winter trend of low volumes and returning to the five-year average, total online listings (as indicated in the second table below) remain significantly below the five-year average. This suggests that the market is rapidly absorbing the new stock.

Source: CoreLogic

It appears that as the market has stabilised in the first half of the year, vendors who had been on the sidelines are now entering the market. This trend is consistent with our observations among our own clients. Our advisory business has seen appraisal inquiries more than double in the past two months. Conversations with the agents we collaborate with also confirm this pattern, with many reporting full pipelines leading into spring.

Notably, investor owners, our primary client base, appear to be particularly active in considering listing their properties. Given rising interest rates, additional regulatory measures (including a potential rent cap proposed by the Victorian Government), and additional land taxes, it is unsurprising that many investors are contemplating exiting the market. Consequently, listing volumes will likely increase in the coming months, offsetting much of the depleted stock levels witnessed in the first half of the year.

How will this surge in stock levels impact property prices? 

On the surface, increased supply would seemingly lead to softer prices as buyers gain more options. Conversely, migration levels remain robust, inflation has peaked, and thus interest rates are likely nearing their peak, providing near-term certainty for home buyers. Moreover, the broader economy remains robust, with steady unemployment levels while the participation rate remains high. Despite concerns about the so-called “mortgage cliff”, its impact on property listings or prices has been minimal so far, though the full effect of this mortgage cohort has yet to be fully felt.

Rental prices remain on a positive trend

Regarding rental prices, national trends continue to show upward movement. However, similar to property prices, the pace of growth is slowing. Vacancy rates in both Brisbane and Melbourne have seen modest increases but remain relatively low, hovering around 1% in both cities (increasing to 1.3% in Melbourne as of July). Notably, the growth in unit/apartment rental prices continues to outpace houses, marking a reversal of the trend observed during the pandemic. In Melbourne and Brisbane, unit/apartment prices remain strong by historical standards, with approximately 4% increases in both markets over the quarter.

State Governments considering rent caps 

Lastly, it's worth mentioning that rent caps are actively being considered by the Victorian state Government, with the Greens pressuring for such policies to be adopted nationally. Although not yet a formal policy, it is evident that governments are under enormous pressure to at least be seen as acting on rent prices. We have been warning about the political pressure and the potential for misguided policy outcomes for some time. As we outlined in the second of our recent series of whitepapers, the idea that greedy investment property owners and/or unscrupulous real estate agents are the villains of the piece is (largely) misguided – as we showed, the majority of owners are making a lower return than if they had invested in a balanced superannuation Fund rather than in a rental property.

Unfortunately, a policy of rental caps is unlikely to stem rental price increases meaningfully and could come into effect just as the market appears to be returning to more normal levels. This represents another challenge for owners, who accommodate more than 25% of the population. They have been the target of numerous recent Victorian Government policy changes, including further rental regulations and new/increase in land tax on rental properties. This approach will likely discourage investors from participating in the market, thereby limiting the supply of rental homes - ultimately the primary driver of rental prices. 

Are there better ways to invest in property?

Several of our clients who recently invested in our Shared Equity Fund have cited this as their primary reason for opting for an alternative structure like Shared Equity instead of direct ownership. In fact, a handful of them have chosen to invest in our fund rather than purchase another property directly. You can learn more about the Fund here.

As always, we’re here to help with any of your property needs, so please don’t hesitate to contact us.