Fri. Mar 24th, 2023

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Updated: Jan 18, 2023, 12:29pm
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The property market took a hit in 2022 as mortgage rates started to increase much faster than initially expected, rising eight times to end the year at 3.1%. To put this into context, the cash rate was sitting at just 0.1% at the beginning of 2022.
“I think what we saw in 2022 was a bit of a roller coaster really in terms of property prices in the property market because we started the year with record prices and then moved into a downturn quite rapidly,” chief of research and economics at Domain, Nicola Powell, told ForbesAdvisor.
Earlier in 2021 the RBA governor, Phillip Lowe, had said that it would not be raising rates until 2024—a comment Lowe has since stepped back from and apologised to borrowers who took out heft loans on the basis of his erroneous advice.
“The RBA kept on insisting that they wouldn’t lift rates until 2024. Now we were skeptical that they could keep to that promise,” SQM Research owner and managing director, Louis Christopher, added.
In 2023 property experts are cautiously optimistic that as interest rates plateau that stability will return to the market. Here’s what we may expect to see.
Related: Australian Property Market Update
Although more rate rises are widely predicted in 2023 they are not expected to be of the magnitude the market saw last year and nor are there expected to be as many.
“I think in 2023, there is this element there [that] we’ve adjusted to this new norm now that interest rates are going to rise. I think that buyers out there are factoring in future interest rate hikes,” Powell said.
But the hit to buyers from last year’s interest rate hikes was significant. Powell points out that for a mortgage of $500,000 the rate increases in 2022 added almost an extra $900 a month to repayments.
SQM Research tracks the number of listings selling under distressed conditions and Christopher notes that nationally these declined over the month of December while rising only slightly (2.9%) over the year.
“Distressed listings actually recorded a fall for the month and still we remained at quite benign levels, suggesting that there’s not a lot of forced selling activity out there so far given the rate rises. Property owners are holding their own, they’re still meeting their mortgage repayments,” he says.
He expects rate rises this year, but not as many as last year.
“I personally believe that the RBA is going to pause before we get to 4%,” he says.
Related: Will Interest Rates Go Down in 2023?
House prices are expected to soften further in 2023 but falls may not be as severe as some expect if the RBA stops increasing rates before the cash rate reaches 4%.
Christopher predicts that an RBA cash rate of 4% (it currently sits at 3.1%) could be the tipping point for distressed properties and a market thud, if not crash.
“Based on the survey we did, consensus was that if we were to see cash rates start to go over 4%, or even at 4%, then the risks start to exponentially rise of major stress in the housing market to the point where we would see a significant rise in default activity, would see a significant rise in forced selling activity as a result, and that would put further downward pressure on housing prices,” he says.
He is optimistic that the RBA is as aware of this possibility as he is and does not believe that rates will reach that high, with prices stabilizing during the year.
Sydney continues to have the most expensive properties—with a median dwelling (houses and apartments) asking price of $1.27 million, according to SQM Data. That was an increase of 3.1% over the month to January 3, 2023. The   average capital city asking price is $1.02 million.
“Sydney remains the most expensive by far….while Melbourne is projected to have a larger population than Sydney, Sydney will still be the most expensive,” Christopher says. “Melbourne has got a larger land base. Whereas Sydney is kind of contained to an extent into a (geographical) bowl which creates limited supply opportunities.”
Perth may also offer relatively good value in 2023.
“[It has] an economy that’s withstood COVID, is surviving quite well with the interest rate rises, and has upside potential especially given the opening of China and the expected increase in demand for commodities as well as real estate from Chinese investors,” Chistopher says.
Powell points out that different cities offer different opportunities depending on what your financial goals might be.
“If you’re looking for a cash flow, you know some of the other markets have much higher rental yields. So Perth for example, their yields are above 5% for houses and above 6% for units. When you compare it to Sydney, Sydney rental yields are below 3% for houses and just 4% for units,” she says.
First home buyers are likely to return to the market first, buoyed by some of the first home buyer incentives currently available.
“I think once we see some certainty surrounding interest rates as mentioned and provided the cash rate does stabilize at the 4% mark, then I think we will see more first time buyers in the marketplace in 2023 and then followed by investors,” Christopher says.
“So rental yields have risen which provides some attraction towards investors.”
Powell agrees that higher rents and rental yields are likely to be inviting for investors.
“It could be lucrative, it could be enticing, for them to come back into the property market,” she says.
Rental yields have risen dramatically over the past 12 to 18 months, and in the December quarter posted the steepest annual increase in rental prices, according to Domain, with rents rising 14.6% for houses and 17.6% for units.
“The rental market ,when you look across the combined capitals, it has seen the longest continuous stretch of record price growth that we’ve ever seen,” Powell says.
Christopher expects rents to peak later this year.
“So what eventually happens is that more and more people who are renters will start sharing with each other or group together for housing,” he says. “I do believe we’ll see more renters turn themselves into first buyers and so that will help to an extent as well in the rental market.”
Related: Property Investment in Australia: Glossary of Terms
After a rocky 2022, if the cash rate manages to stay under 4%, 2023 may be a year of two halves on the property market. The first half may continue to see some price falls with the potential for improvement in prices later in the year.
“I believe that by the end of this year we’ll be talking about property prices moving into a recovery,” Powell says.
“You know, we’re expecting interest rates to hit a peak some point this year, and it’s likely the RBA will start cutting them again. And I think that we’re going to see a similar thing in the property market. I think what we’ll see is a stabilisation of prices sometime this year, later on in the year, and we will start to see prices moving to a recovery towards the end of the year.”
The future is anyone’s guess, but while property may continue to slide in value, very few experts would claim that property would crash entirely. Many Australians are invested in property—either as their prime residence or as part of a property portfolio—and the market is worth some $9.4 trillion to the economy as of November 2022. It is therefore within the government’s interest to ensure it doesn’t collapse.
It really depends on the property you are looking at, where it is located and your purchasing power. There is not one property market, after all, there are lots of different market segments—from units and housing to off-the-plan purchases and regional areas—with various pros and cons to investing in each. It is definitely not a good time to be overcommitting on your mortgage, but investors will need to make up their own minds as to whether the market they are looking at investing in holds value for the long-term.
The capital city average asking price for a house in the first week of January 2023 was $1.25 million while the average asking price for a unit was $621,320, according to SQM Research.
Penny Pryor has more than two decades experience writing, reporting and editing financial services publications. She has contributed to, and edited, the Money Section of the Sun Herald and The Sunday Age, written for the Australian Financial Review and the Sydney Morning Herald, and currently contributes to IndustryMoves, SuperGuide, and Chartered Accountants Australia and New Zealand’s Acuity Magazine.


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